FPI-Logo-Institute-highres.jpg

FB-icon.jpgTwitterLogo_-sq48.png

The 2020 HGTV Smart Home, Income Taxes, and Family Prosperity

Posted by Scott Moody - 2020-04-27 21:14:07

Print Friendly and PDF

 

 

This year’s 2020 HGTV Smart Home is in Pittsburgh, Pennsylvania. According to the HGTV Rules, it comes with the home and furnishings ($1,391,424), $100,000 in cash, and a 2020 Mercedes-Benz GLB automobile ($61,150) for a total prize value of $1,555,574.

 

Of course, the $100,000 in cash will come in handy, because if you win the 2020 HGTV Smart Home you will need to be prepared for a hefty federal individual income tax bill and, depending on where you live, a hefty state individual income tax bill—both of which I have estimated in this post.

 

This analysis excludes the multitude of other taxes such as any real estate, deed or transfer taxes and, most especially, the property tax which you pay year, after year, after year . . . well, you get the picture.

 

As they state in the rules: Real estate transfer taxes, deed recording charges, closing costs, current and future real estate taxes, title insurance, homeowner’s hazard and liability insurance, and all other taxes, costs, fees, and expenses related to the purchase, receipt, ownership and maintenance of the house shall be the responsibility of the Grand Prize Winner commencing as of the date the Grand Prize Winner accepts the Grand Prize.”

 

The Federal Income Tax

 

Overall, the federal income tax bill alone comes to a whopping $499,165 (see assumptions below) or 28.1 percent of the prize value!

 

If you plan on keeping this home, you should be prepared to take on a second job or take out a home equity loan to pay Uncle Sam as the $100,000 in cash won’t cover it (no wonder Lending Tree is sponsoring the cash award . . . they will be right at your side when you realize you need a loan).

 

But wait there’s more . . .

 

The State Income Tax

 

Calculating the state income tax owed is much more complicated. Your home state provides a tax credit for income taxes paid to another state so you may owe additional income taxes if your home state levies a higher tax bill. If you think that sounds complicated, just imagine what professional athletes go through paying the "Jock Tax" (income tax) to every state they play in.

 

Table 1 shows the state individual income tax bill that would be owed to Pennsylvania ($47,756) and any additional taxes owed to your home state (if different). If you live in the nine states that do not have an individual income tax—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—then your tax bill is simply the combined bill for Uncle Sam and Pennsylvania ($546,922). There are only 3 other states whose income tax bills are lower than Pennsylvania’s income tax bill so you would not owe anything extra in those states as well.

 

Table 1 Federal and State Individual Income Tax Bill for Winning the HGTV 2020 Smart Home in Pittsburg, Pennsylvania.jpg

 

However, 38 states have bigger income tax bills than Pennsylvania so if you live in one of those states expect to pay more. The worst state to live in is California with an additional tax bill of $114,002 which brings the combined federal and state income tax bill to $660,923, or 42.5 percent of the prize value. Following closely behind is Hawaii (combined tax bill of $658,174, 42.3 percent of the prize value) and Oregon (combined tax bill of $649,394, 41.7 percent of the prize value).

 

Fortunately, HGTV does provide an escape hatch by offering cash in lieu of taking possession of the home worth $600,000 and you keep the $100,000 in cash and Mercedes for a total value of $761,150.

 

Again, as shown in Table 2, the worst states to live in are the same as above (albeit with a slightly different order)—Hawaii (combined tax bill of $276,851, 36.4 percent of the prize value), Oregon (combined tax bill of $276,809, 36.4 percent of the prize value), and California (combined tax bill of $272,782, 35.8 percent of the prize value).

 

Table 2 Federal and State Individual Income Tax Bill for Taking teh Cash-Option on the HGTV 2020 Smart Home in Pittsburgh, Pennsylania.jpg

 

Note that the tax bill, as a percent of the prize value, drops dramatically under the cash option. The reason for this is the federal income tax and most state income taxes have progressive tax rates. This means that the marginal tax rate increases with income.

 

For example, in the 2019 federal income tax all income between $0 and $19,050 for a married taxpayer faces a 10 percent marginal tax rate and over $600,000 the marginal tax rate jumps 270 percent to 37 percent. So, the smaller cash option value is mostly taxed under the lower marginal tax rates whereas the full prize value is mostly taxed at the highest 37 percent tax rate.

 

Federal 2018 Tax Rate Schedule for a Married Filing Jointly Taxpayer

$0 to $19,400        10 percent

$19,401 to $78,950    12 percent

$78,951 to $168,400    22 percent

$168,401 to $321,450    24 percent

$321,451 to $408,200    32 percent

$408,201 to $612,350    35 percent

Over $612,351        37 percent

 

Keep the Home?

 

There is no clear-cut answer as to whether-or-not to keep the house (and live in it) or take the house and sell it. You might net more after-taxes if you take the house and sell it yourself, but you have to hope that the appraised value is close to the real market value at the time of sale which adds a degree of riskiness. Additionally, you may have issues with the Capital Gains tax which will further reduce the attractiveness of the sell-it-yourself option.

 

Renting the home is further complicated by local zoning ordinances.

 

However, if you decide to keep the home it is very likely that you will need to take a second mortgage on the house (unless you have a few hundred thousand just lying around) to pay the tax bill. Using the worst case scenario (California), a $560,923 ($660,923 minus the $100,000 in cash) mortgage over 30 years at 4 percent interest would cost you about $2,678 a month. So, have you really won yourself a house, or a mortgage?

 

Boosting Family Prosperity

 

Winning such a large prize is truly a once-in-a-lifetime event. The trick is to turn this one-time event into lifetime security and boost your overall family prosperity. Too often winning a large amount of money leads to divorce and/or bankruptcy putting family prosperity into reverse.

 

My suggestion would be to take the cash option and invest it into a Bank on Yourself plan which is a whole-life insurance policy that maximizes long-term cash value. If you want to learn more about Bank on Yourself we highly recommend the Not Your Average Financial Podcast with Mark Willis (as a bonus, you can also hear us chat with Mark about the Family Prosperity Index).

 

A Bank on Yourself plan (which is something anyone can do) can be used for you retirement, pay for college expenses, or provide seed capital to start a business. As such, not only would your winnings provide the foundation for your own family prosperity, but also for your community, state, and country.

 

Other

 

If your tax situation is more complicated than what is shown here, you can use this individual income tax calculator (thanks to icalculator) to make a more precise estimate.

 

Tax assumptions: The tax analysis uses a married couple with two children taking the standard deduction and is based on 2020 law for state estimates.

 

Please support our work by purchasing from FPI Ventures--below are examples of our officially licensed merchandise.

 
 

About the Author

Scott Moody
J. Scott Moody has worked as a Public Policy Economist for over 18 years. He is the author, co-author and editor of 180 studies and books.