Have you heard about the Houston Astros fan who was taxed on the doughnut coupons he won as a prize? There’s a valuable tax lesson to be learned from it.
Strategy: Simply turn down prizes and awards you don’t want. They may constitute taxable income whether you use the item or not.
Here’s what happened: On the Houston Astros’ fan appreciation day in 2010, Bob Choate won 315 coupons from Shipley’s Do-Nuts. Each coupon was worth a cup of coffee and either a free doughnut or a dozen doughnut holes. Subsequently, Choate received a Form 1099 stating that he owed tax on the prize, valued at around $925.
Choate protested to the Astros and claimed he would not have accepted the coupons if he knew they would cost him money. Before adding in the “doughnut money,” Choate said he would have received a tax refund of $302. The extra 1099 dropped his refund to $65, or $237 less.
Eventually, Lawrence Shipley, owner of the Houston-based doughnut chain, agreed to make up the difference to Choate. And the Astros gave him four tickets to the opener and an autographed Jeff Bagwell baseball.
Tip: Certain awards are tax-free if they’re transferred unused to a charitable, religious or educational institution.