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Are Merit Awards & Prizes Taxable

Are Merit Awards & Prizes Taxable

It may come as a surprise that awards and prizes are taxable. The prize is filed under income tax if a taxpayer receives an award from a competition. This is because the market value determines the worth of the prizes at the time. But there are certain conditions where the prizes and awards are exempted from tax. But many taxpayers still need clarification about what prizes or awards are taxable and how to go about the payment. 

How Are Prizes Distinguished from a Gift?

Awards and prizes are a way to give recognition to a receiver for some affirmative actions, such as:

  • Winning a contest:

  • Performing extraordinarily at work; or

  • Inventing something new.

On the other hand, gifts are presented based on the giver’s intent. The giver presents the gifts with disinterest and without generous action. In essence, a gift is not given out of legal or moral obligation for some past works. In some cases, the receiver has no intention or performs no action.

Prize vs. Scholarship

If the recipient can use the money in any way they like, then the gift is not a scholarship or fellowship. Therefore, the receiver is to pay 30% NRA (Non Resident Alien) withholding while another may pay 14% for being part of NRA. However, the offset involves only scholarship and fellowship grants, and the recipient must be under a certain category, such as F, J, M, or Q status.

Furthermore, prizes are section as

  • These must be included in the gross income of the receiver.

  • However, there are situations where some prizes and awards are excluded from tax. These are certain qualified scholarships or fellowships that are above tax law even when given as prizes or awards. For example, they can be excluded from gross income if prizes and awards are given for religious, scientific, educational, literacy, charitable, or civic recognition, but meeting the following conditions:

  • The recipient got the gift without contesting or proceeding

  • No present deed was done, and no future service is required of the recipient because of the award

  • Also, the prize or award is sent to a tax-exempt governmental unit or tax-exempt non-charitable organization residing in the designation as stated by the recipient. Remember that this must be in written form to the award’s presenters to avoid them sending the money to your account. Ensure the money doesn’t stay in your account to avoid tax deductions, according to IRC Sec. 74(b).

However, if these three conditions are not met, the prizes are taxable under the category 2 prize, paid to nonresident aliens, reported on form 1042-S, and attracted 30% withholding. Thus, even Pulitzer and Nobel prizes are subject to tax under standard income tax rates.

How to Pay Tax on Awards or Prizes 

  • Check who receives the payment, whether a vendor, but ensure it is not an employee.

  • Check if your prospective NRA allows taxes.

  • Submit necessary documents to the host department 

  • The host department forwards the documents to the Office of International Taxation for approval.

  • Remember that awards are subject to a 30% tax withholding of the payor’s residence.

  • Furthermore, the prize and award are filled on 1042 and 1042-S. 

After undergoing such steps, you might choose not to report the award or prize on your income tax. Also, there is no use taking a charitable deduction from it. In other words, the award is not considered taxable by the IRS, and it appears like the award never existed. However, you can further give the money to charity to be more secure. Many people, such as Obama, have done this and set an example for many to follow.


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Pat Raskob, Emeritus
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