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Color of Money: No taxes for you! Billionaire Robert F. Smith's pledge to pay off Morehouse graduates' student loans may truly be a gift.

Michelle Singletary on

WASHINGTON -- Getting something for free in America can still end up costing you something.

Those "free" T-shirts that credit-card companies give to college students can sometimes result in high-interest rate debt for years.

The invitation for a "free" meal that includes information about managing your money in retirement is often just a sales pitch for an investment product that is likely to be overpriced, unnecessary or, in the worst case, a scam.

In 2004, Oprah Winfrey famously gave a car to each of her 276 audience members to celebrate a season premiere of her talk show: "You get a car! You get a car! Everybody gets a car."

But for many, the excitement turned to some disappointment when they realized that their new Pontiac G6 sedan would come with a hefty tax bill.

Turns out that the show's giveaway was part of a promotion by General Motors for the now-defunct Pontiac brand. This made the $28,500 car a prize -- not a gift.

 

When you win money, like in a lottery, or an item, like a car, you owe ordinary income taxes on the value of the prize.

Winfrey's giveaway was intended for audience members who desperately needed a car, so it's understandable that some weren't completely happy about having to pay taxes on something they thought was free. For winners who worried about how to pay the tax they could trade down for a less expensive model thus reducing taxes owed, take out a loan to cover the tax bill using the car as collateral or accept the vehicle and then sell it to raise the money needed to pay the IRS.

So when philanthropist and billionaire Robert F. Smith recently announced that he was paying off all the student loans for the 2019 graduating class of Morehouse College, I wondered if this was a repeat of the Winfrey win.

Would Smith's altruism still leave students with a debt to pay to Uncle Sam?

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