If you win prize money or physical prizes, they are subject to taxation as income for the tax year in which the prize was awarded. Prizes that exceed $600 in value require the sponsor of the contest to generate a 1099-MISC form for the prize winner and the Internal Revenue Service (IRS). Prizes worth less must be reported as other earnings on the IRS Form 1040, U.S. Individual Income Tax Return. The total tax owed on the winnings varies based on the tax bracket an individual falls into based on other earnings.
1. Obtain a copy of tax Form 1040 and the IRS publication, 1040 Instructions.
2. Calculate your total earnings from wages, self-employment earnings, retirement benefits and the additional income sources listed under the "Income" section of Form 1040. Include your prize winnings in this section's total.
3. Complete the "Adjusted gross income" section of the 1040 by inputting adjustments such as IRA deductions, education expenses and other eligible deductions. At the end of this section your adjusted gross income is calculated.
4. Total your taxes and credits by calculating the value of your exemptions, itemized deductions and tax credits until you arrive at your taxable income.
5. Refer to the tax tables in the instructions for Form 1040 to determine the tax rate for your earnings bracket. Multiplying this tax rate by your gross prize winnings provides a rough estimate of the taxes owed on the prize money, but further calculations provide a truly accurate picture.
6. Return to the "Income" section of Form 1040 and divide your prize winnings by your total income. This provides you with the percentage of your total income attributed to prize winnings.
7. Multiply your taxable income by this percentage to determine the portion of your taxed income allotted to prized winnings. Multiply this dollar amount by the tax rate for your income bracket to find the total taxes owed on your prize money.
Items you will need
- IRS Form 1040
- IRS Publication 1040 Instructions
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