Federal Income Tax on Prizes

Prizes you receive, in the form of cash or property, are generally subject to federal income tax. Prizes or awards you receive from lotteries or raffles are considered gambling winnings and are taxable. If you receive property, the fair market value of the property is subject to tax. As pointed out by Kay Bell on Bankrate.com, when you receive a prize in the form of property, such as a car, you will have to come up with the cash from other sources to pay the income tax on the prize.

Jim Wang points out on the Bargaineering website that many people think that a prize is subject to an especially high income tax rate. This is not necessarily the case. Prize winnings are taxed as ordinary income at your marginal tax rate. What may happen is that the value of the prize puts you in a higher tax bracket and you would pay a higher rate of tax than you normally would.

The company or organization that awards you a prize has to give you a 1099 for tax purposes. When the prize is property, or a vacation trip, the amount reported on the 1099 may be overstated. As indicated by George Sanz on Bankrate.com, in that case you may have to contact the IRS if you are reporting a lesser amount as income. Based on the information on the 1099, the IRS will contact the awarder of the prize and they should issue a revised 1099.

If you receive a raffle prize of over $600 from a tax-exempt organization, you should receive a Form W-2G. According to the IRS, if the raffle prize is over $5,000, the organization must withhold a 25% tax and should ask you to complete IRS Form 5754, Statement by Person(s) Receiving Gambling Winnings. If the organization does not get your social security number, backup withholding at a rate of 28% would be required.

If a raffle prize is in the form of property, you as the winner may be required to pay the organization the 25% withholding tax when you receive the prize. The organization would remit the tax to the IRS on your behalf. Or the organization may pay the withholding tax. In this case the organization would pay the 25% on the value of the prize and on the withholding tax it pays on your behalf. On Form W-2G, the organization would report the value of the prize grossed up for the withholding tax paid on your behalf, and the withholding tax.

According to the IRS, bonuses or awards you receive at work for outstanding performance are generally considered employee compensation and would be included in your W-2. If you receive a prize such as a vacation trip for meeting a sales or other type of goal, you must include the fair market value of the goods and services in your taxable income.

If you receive tangible personal property as an employee achievement award, you can exclude up to $1,600 per year of the employer's cost of the award if the award is a qualified plan award. Your employer should be able to tell you if it is a qualified plan award. If it is not a qualified plan award you can exclude up to $400 per year.

If you are a salesperson and you receive points that you can redeem for merchandise, you must include the fair market value in your taxable income. The points are taxable in the year when you receive them and not in the year when you redeem the points for merchandise.

Sources:

Form 5754, Statement by Person(s) Receiving Gambling Winnings, IRS

Form W-2G, Certain Gambling Winnings, IRS

George Saenz, Reducing price taxes, Bankrate.com

Jim Wang, Prize Winnings Tax, Bargaineering

Kay Bell, Prize Winnings, Bankrate.com

Publication 525, Taxable and Nontaxable Income, IRS