Taxes on Prize Winnings and More!
Editor’s Note: Are taxes on prize winnings reported on your tax return? What about taxes on lottery earnings? We’re here to tell you!
Ever find cash in a jacket or a pair of pants you haven’t worn in a while? Feels great, doesn’t it? It’s the kind of money you weren’t counting on that can help with a looming bill or be spent on something you could not otherwise justify buying.
While winning money might feel just as good as discovering money in your pocket, the two are very different for tax purposes. So before going on a shopping spree, there is one caveat you should know. Unlike money found, winnings are taxable.
Taxes on Winnings 101
Did you know taxes on winnings should be reported as ordinary income? Yes, it’s true. Generally, the U.S. federal government taxes prizes, awards, sweepstakes, raffle and lottery winnings, and other similar types of income as ordinary income, no matter the amount. This is true even if you did not make any effort to enter in to the running for the prize. Your state will tax the winnings too, unless you live in a state that does not impose a state-level income tax.
The tax rate will be determined by your income on your federal income tax paperwork. So, for instance, if you make $42,000 annually and file as single, your federal tax rate is 22%. If you win $1,000, your total income is $43,000, and your tax rate is still 22%. It’s conceivable that winning a large amount could bump your income into a higher tax bracket. (See tax bracket and rate information explained here.)
Reporting Tax on Winnings
Taxes on Prize Money and Sweepstakes Winnings
Typically, tax on winnings, like sweepstakes or prize money, should be reported to you in Box 3 (other income) of IRS Form 1099-MISC. This includes winnings from sweepstakes when you did not make an effort to enter and also applies to merchandise won from a game show.
Taxes on Lottery Winnings, Raffles, Charity Drawings, and Sweepstakes by Wager
Tax on winnings should be reported to you in Box 1 (reportable winnings) of IRS Form W-2G. This includes lottery winnings, sweepstakes you entered by making a wager, church raffle tickets, or charity drawings. You can claim an itemized deduction for the amount of your wager only to the extent of your gains.
If you receive your winning in property or services, you will have to include the fair market value of your winnings on your tax return.
A Final Reminder About Tax on Winnings
Because the payor may not be required to withhold income taxes, it’s advisable to consult a tax pro to determine if you should make estimated tax payments to cover the taxes resulting from the winnings. That being said, once the tax implications are addressed you may still have plenty of winnings remaining to cover the cost of that coveted item you want to buy.
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