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This year’s HGTV 2017 Smart Home is in Scottsdale, Arizona. According to the HGTV contest rules, it comes with the home and furnishings ($1,332,667), $100,000 in cash, and a 2017 Mercedes-Benz GLE 550e 4Matic® ($79,040) for a total prize value of $1,511,707.
Of course, the $100,000 in cash will come in handy because if you win the 2017 HGTV Smart home, because you will need to be prepared for a hefty federal individual income tax bill and, depending on where you live, a 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: “All costs, taxes, fees, and expenses associated with a prize or the acceptance and use of any element of a prize not specifically addressed above are the sole responsibility of the winner. All federal, state, and local taxes on prize are winner’s responsibility. The Grand Prize Winner will be issued a 1099 tax form for the ARV of the prize.”
Overall, the federal income tax bill alone comes to a whopping $533,530 (see assumptions below) or 35.3 percent of the prize value. If you plan on keeping this home, best 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 Quicken Loans is sponsoring the cash award . . . they will be right at your side when you realize you need a loan).
Calculating the state income tax owed is much more complicated. Arizona does have a general individual income tax. As a result, your tax bill will first be determined by Arizona’s individual income tax.
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 Arizona ($65,257) 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 Arizona ($598,787). There are 10 other states whose income tax bills are lower than Arizona’s income tax bill so you would not owe anything there as well.
However, 31 states have bigger income tax bills than Arizona 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 $111,033 which brings the combined state and local tax bill to $709,820, or 47 percent of the prize value. Following closely behind are Hawaii (combined tax bill of $687,229, 45.5 percent of the prize value) and Minnesota (combined tax bill of $671,993, 44.5 percent of the prize value).
Fortunately, HGTV does provide an escape hatch by offering cash in lieu of taking possession of the home worth $670,000 and you keep the $100,000 in cash, and the Mercedes-Benz for a total value of $849,040. Again, as shown in Table 2, the worst states to live in are the same as above.
There is no clear-cut answer as to whether or not to keep the house, take the house and sell it, or opt for the cash value. If you look at the last two options, you might net more after-taxes if you take the house and sell it yourself—of course you hope the appraised value is close to the real market value at the time of sale which adds a degree of riskiness. Additionally, you may issues with the Capital Gains tax which will further reduce the attractiveness of the sell-it-yourself option.
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 $609,820 ($709,820 minus the $100,000 in cash) mortgage over 30 years at 4 percent interest would cost you about $2,911 a month.
My suggestion would be to take the cash option and outright buy a nice home with the cash and have zero debt. And if you have had your fill of paying taxes, you could mimic the Free-Staters and buy a house in the handful of America’s tax havens left (all in New Hampshire) where there are no state and local individual income taxes, no state or local sales taxes and very low (in some case no) local property taxes.
Or, if New Hampshire is not your style, you can check out the tax burdens in other states with our unique tax burden app which shows tax burdens by state, county, by type and over time. 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.
If you decide to keep the house, at least Arizona has a low overall tax burden you can enjoy. I’m in the midst of updating all of the 50 state tax burden blogs with the latest data, but I went ahead and included Arizona below since it will take me some time to get to it otherwise.
Arizona has the Sixteenth Lowest Tax Burden in the Nation for 2015
In Fiscal Year (FY) 2015, Arizona collected $23.1 billion in state and local taxes. While this is an impressive sum of money, it tells us little about whether or not the average Arizona taxpayer can afford this level of taxation.
As shown in Chart 1, Arizona’s state and local tax burden (tax collections divided by private sector personal income) was the 16th lowest in the nation for FY 2015 at 13.1 percent—or -9 percent below the national average of 14.4 percent.
As shown in Chart 2, Arizona’s tax burden has increased over time by a modest 10 percent to 13.1 percent in FY 2015 from 12 percent in FY 1950.
Arizona’s low state and local tax burden is driven by a low individual income tax burden (2.1 percent, 40th highest), corporate income tax burden (0.4 percent, 34th highest), property tax burden (3.7 percent, 31st highest) and all other taxes (1.7 percent, 47th highest). However, Arizona does have a very high sales tax burden (5.2 percent, 7th highest) partially offsetting the other lower tax burdens.
As shown in Chart 3, Arizona’s 13.1 percent tax burden is greater than these combined industries: manufacturing (8 percent), educational services (1.7 percent), arts, entertainment, and recreation (1.2 percent), utilities (0.9 percent), and farming (0.7 percent).
Of course, as shown in Chart 4, the tax burdens for local government can vary just as much as they do among the 50 states. As such, we have also calculated the local government tax burden for every county in Arizona—this includes every taxing jurisdiction within the geographic county borders whether it is a city, a special district, or county government itself.
Arizona only has 15 counties and are listed below from highest to lowest local government tax burden:
Interestingly, Maricopa County, where Scottsdale is located, has the lowest local tax burden in Arizona at 4.6 percent. In particular, that means a lower property tax burden which, after the income tax, is the next most onerous tax the HGTV Smart Home winner will face.
Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 65 years! See if your state has been above or below the national average?
Also, check out our tax analysis of the recent HGTV 2017 Dream Home, DIY Network 2016 Blog Cabin, HGTV 2016 Smart Home, HGTV 2016 Dream Home, HGTV 2015 Urban Oasis, DIY Network 2015 Blog Cabin, HGTV 2015 Smart Home, HGTV 2015 Dream Home, HGTV 2014 Urban Oasis, DIY Network 2014 Blog Cabin, HGTV 2014 Dream Home and HGTV 2014 Smart Home.
Tax assumptions: The tax analysis uses a married couple with two children taking the standard deduction and is based on 2017 law.