This year’s 2018 HGTV Smart Home is in Bluffton, South Carolina (see Google map at end of post). According to the HGTV contest rules, it comes with the home and furnishings ($1,482,986), $100,000 in cash, and a 2018 Mercedes-Benz GLC 350e 4MATIC Plug-in-Hybrid ($49,999) for a total prize value of $1,632,985.
Of course, the $100,000 in cash will come in handy, because if you win the 2018 HGTV Smart Home 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 $530,333 (see assumptions below) or 32.5 percent of the prize value—which is significantly lower thanks to the Trump tax cut (see information on tax cut below).
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 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. 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 South Carolina ($111,264) 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 South Carolina ($641,598). There are 40 other states whose income tax bills are lower than South Carolina’s income tax bill so you would not owe anything extra in those states as well.
However, 10 states have bigger income tax bills than South Carolina 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 $59,787 which brings the combined state and local tax bill to $701,285, or 43 percent of the prize value. Following closely behind are Hawaii (combined tax bill of $697,373, 42.7 percent of the prize value) and Oregon (combined tax bill of $688,038, 42.1 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 the BMW for a total value of $749,999.
Again, as shown in Table 2, the worst states to live in are the same as above (albeit with a slightly different order)—Oregon (combined tax bill of $224,462, 29.9 percent of the prize value), Hawaii (combined tax bill of $224,085, 29.9 percent of the prize value), and California (combined tax bill of $220,239, 29.4 percent of the prize value).
Note that the tax bill, as a percent of the prize value, drops dramatically under the cash option. The reason for this is that 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, under the 2018 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 $19,050 10 percent
$19,051 to $77,400 12 percent
$77,401 to $165,000 22 percent
$165,001 to $315,000 24 percent
$315,001 to $400,000 32 percent
$400,001 to $600,000 35 percent
Over $600,001 37 percent
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 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 $601,385 ($701,385 minus the $100,000 in cash) mortgage over 30 years at 4 percent interest would cost you about $2,535 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 move to the one state like the Free-Staters have done 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, no estate tax, 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.
Tax assumptions: The tax analysis uses a married couple with two children taking the standard deduction and is based on 2018 law for state estimates.
Additionally, the recently enacted tax cuts under President Donald Trump will go into effect for the 2018 calendar year. Since the HGTV Smart Home will be awarded in 2018, the winner will pay their federal income taxes under the reformed tax code (as shown in Tables 1 and 2).
Key changes in the tax code due to the Trump tax cut that impacts this analysis:
Overall, I have estimated that these tax changes will save the HGTV Smart Home winner $53,088, if they keep the home, thus paying $530,333 to the IRS instead of $583,421. If the winner takes the cash-option, they would save $30,923 thus paying $203,629 to the IRS instead of $234,552.
Also, check out our tax analysis of the recent 2018 HGTV Dream Home, 2017 HGTV Urban Oasis, 2017 DIY Ultimate Retreat, HGTV 2017 Smart Home, 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.
Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 66 years! See if your state has been above or below the national average?
Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.