Congratulations on winning a prize: in addition to your trip, cash or other prize, you've also won a higher tax bill from the Internal Revenue Service, because your prizes count as taxable income. The exact percentage of your prize money that you have to share with Uncle Sam depends on your income tax bracket.
You must report all your income, including prizes, on your tax return. If you received something besides cash, you must include the fair market value of what you received in your taxable income. For example, if you win a trip to Hawaii that would usually cost $6,000 and a new car valued at $19,500, you have to include an extra $25,500 in your income taxes.
The value of your prize is taxed as ordinary income, which means the applicable rate depends on your tax bracket. As of 2013, the rates range from 10 percent to 39.6 percent. Most taxpayers fall somewhere in the middle. For example, say you win a $6,000 trip and you fall squarely in the 25 percent tax bracket. You're going to have to shell out an extra $1,500 to Uncle Sam.
If the prize comes from your employer, such as a bonus for closing the most home sales for the month, it should be reported on your Form W-2 you receive at the end of the year, just like the rest of your income. If you receive a prize worth $600 or more, you should receive a Form 1099-MISC from the person or group who gave you the prize. However, just because you received a smaller prize -- or didn't receive a 1099-MISC -- doesn't mean you don't have to report it on your taxes. According the IRS, there's no minimum amount of income you don't have to report on your taxes.
If the prize is already included in your W-2 because it's from your employer, the income is reported just like your other earnings -- you can use whichever form you usually use to file your return. However, if you're reporting your prize as miscellaneous income, you must use Form 1040 and report the income on line 21. The other forms -- 1040A and 1040EZ -- just don't have a line for it.
- Internal Revenue Service: Publication 525 -- Taxable and Nontaxable Income
- Bankrate.com: Surprise! You Won the Prize and Now You Owe the IRS
- Internal Revenue Service: Reporting Miscellaneous Income
- Internal Revenue Service: Form 1099-MISC Instructions
- Forbes: IRS Announces 2013 Tax Rates
- 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.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."