If you win prize money or physical prizes, they are subject to taxation as income for the tax year in which the prize was awarded. Prizes that exceed $600 in value require the sponsor of the contest to generate a 1099-MISC form for the prize winner and the Internal Revenue Service (IRS). Prizes worth less must be reported as other earnings on the IRS Form 1040, U.S. Individual Income Tax Return. The total tax owed on the winnings varies based on the tax bracket an individual falls into based on other earnings.
Obtain a copy of tax Form 1040 and the IRS publication, 1040 Instructions.
Calculate your total earnings from wages, self-employment earnings, retirement benefits and the additional income sources listed under the "Income" section of Form 1040. Include your prize winnings in this section's total.
Complete the "Adjusted gross income" section of the 1040 by inputting adjustments such as IRA deductions, education expenses and other eligible deductions. At the end of this section your adjusted gross income is calculated.
Total your taxes and credits by calculating the value of your exemptions, itemized deductions and tax credits until you arrive at your taxable income.
Refer to the tax tables in the instructions for Form 1040 to determine the tax rate for your earnings bracket. Multiplying this tax rate by your gross prize winnings provides a rough estimate of the taxes owed on the prize money, but further calculations provide a truly accurate picture.
Return to the "Income" section of Form 1040 and divide your prize winnings by your total income. This provides you with the percentage of your total income attributed to prize winnings.
Multiply your taxable income by this percentage to determine the portion of your taxed income allotted to prized winnings. Multiply this dollar amount by the tax rate for your income bracket to find the total taxes owed on your prize money.
- IRS.gov: 2012 Insturctions for Form 1099-MISC
- IRS.gov: Form 1040
- IRS.gov: 1040 Instructions 2011
- Internal Revenue Service. "Publication 4706 (Rev. 12-2010)," Page 2. Accessed Oct. 25, 2019.
- Internal Revenue Service. "Instructions for Forms W-2G and 5754 (2019)." Accessed Oct. 25, 2019.
- Brides. "This Is What American Weddings Look Like Today." Accessed Oct. 25, 2019.
- Internal Revenue Service. "2019 Instructions for Forms W-2G and 5754," Page 2. Accessed Oct. 25, 2019.
- Powerball. "Powerball Numbers for January 13, 2016." Accessed Oct. 25, 2019.
- MIT Press Journals. "The Ticket to Easy Street? The Financial Consequences of Winning the Lottery." Accessed Oct. 27, 2019.
- Federal Trade Commission. "Winners are losers in lottery & sweepstakes scams." Accessed Oct. 27, 2019.
Ashley Mott has 12 years of small business management experience and a BSBA in accounting from Columbia. She is a full-time government and public safety reporter for Gannett.