Everyone loves prizes! But when it comes to prize taxability, you might end up sharing some of your winnings with the IRS. Understanding the implications of banking a big win can help you prepare when tax season comes.
The Taxability of Prizes
Whether it’s an all-expenses-paid trip overseas or a brand-new car, almost all prizes count toward your taxable income. That means you’ll need to report them on your income tax return as “other income.”
The prize tax rule applies to prizes valued at $600 or more. However, even prizes below that reporting threshold may still need to be reported to the IRS, depending on the prize sponsor. This includes any cash prizes, free services, or merchandise that you may have been awarded in the tax year. So as the winner, be on the lookout for the proper Form 1099-MISC sent to you from the sponsor.
Different rules apply to employee awards, which can work out better in your favor! When you receive prizes or something else of value from your employer, those will usually fall under the category of a business expense, fringe benefit, or an award rule. Things like a free holiday pie or a special service award will typically be classified as a non-taxable award. But a bonus or receiving prize points to use on merchandise—usually seen as a sales award—will often be reported as taxable income.
In addition, there’s also a separate tax code that applies to gifts. For the 2023 tax year, the annual gift threshold is $17,000 for individuals, or $34,000 for married couples. As long as you received a gift from someone that totals less than that amount, you won’t need to claim it as prize income. That’s why it’s good to know the difference!
Other Tips for Handling Your Prize Taxes
If you’re fortunate enough to win a prize, it’s important to establish the fair market value of the property to understand the best next steps for your tax situation. You don’t want to end up paying tax on a prize with an over-inflated value. So always make sure you can gather up the right information to verify that prize’s real-world value against how it was advertised in the contest. For merchandise prizes, get copies of their advertisements that state their retail price. For vacation packages and trips, you can document the current hotel rates and transportation costs to help confirm the fair market value of your prize. Then you’ll have the details you need to get your Form 1099 value corrected, as needed.
Of course, if you’d rather avoid paying tax on the prize, you can always opt to donate the prize to charity or decline the prize altogether. If nothing else, be sure to consider what the tax law will have in store for you! Depending on the value, you may need to make an estimated tax payment to help offset a big surprise when it comes time to file.
There are lots of questions to ask when it comes to tax preparation—and especially with the tax obligations for prizes. Whenever you have questions along the way, know that our team at NSO & Company is here to help!
