Posted by The TaxAdvocate Group, LLC

Taxes On Lottery, Prize Winnings & More

Taxes On Lottery, Prize Winnings & More

Have you ever found money in a jacket or pants that you haven't worn in a while? Isn't that awesome? The amount of money you don't know you have can help you with a future account or spend on something you wouldn't otherwise justify buying.

While winning money from a lottery can be as good as finding unexpected money in your pocket, the two are very different from a tax standpoint. So, before you go shopping, you must know the difference. Unlike the money you find, your income is taxable.


Taxes on Lottery Winning 

Did you know that lottery winnings must be declared as normal income? Yes, it's true. Lotteries, raffle draws, awards, prizes, sweepstakes, and other similar income types are generally taxed by the US federal government as ordinary income regardless of the amount. This is true even if you made no effort to participate in the prize race. Your state will also charge you income tax unless you live in a state that does not charge income tax.

Your income will determine your tax rate. For example, if you earn $42,000 a year and claim to be single, your federal tax rate is 22%. If you win $1,000 from a lottery, your total income will be $43,000, and your tax rate will still be 22%. It is conceivable that earning a large amount could push income into a higher tax category. 


Reporting Taxes on Winnings

Taxes on sweepstakes winning and prize money

In general, income taxes, such as prize money or sweepstakes, should be reported in Box 3 (Other Income) of IRS Form 1099-MISC. This includes lottery winnings when you have not made an effort to participate and also applies to goods won in a gaming program.


Tax on lottery winnings, charity drawings, raffles, and sweepstakes entered by wager

Income taxes must be declared in Box 1 (reportable winnings) on the IRS W-2G form. This includes lottery prizes, raffles you bet on, church raffles, or a charity lottery. You can only claim an itemized deduction from your bet based on the size of your winnings.

If you receive your winnings in the form of properties or services, you will need to include your income's fair market value on your tax return.


Bottom Line

Many people dream of winning a big prize in a lottery, sweepstakes, or contest. The problem is when the winning is not in cash, the tax burden and additional expenses associated with your income can increase. Before accepting a prize, find out how much it is worth and how much it will cost you before accepting it. Remember that when you win something, you are responsible for paying taxes. You usually pay taxes in the year you receive the prize, which may not be the same year you won it.

Before accepting an award, consider the financial implications of holding it and decide that it will have the greatest positive impact on your finances in the long run. Otherwise, your big win could turn into a losing proposition.

Summary

  • Income tax is paid at the federal and state levels.

  • Most tangible prizes, such as cars and homes, are taxed at fair market value.

  • Taxes on lottery winnings are based on accepting a fixed amount or deciding to accept annuities paid for several years.

  • You are taxed for everything you win, whether it is a prize or money.


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