Why You Should Pay Taxes on Winnings in US | Sweepsadvantage.com

Taxes On Sweepstakes Winnings in US: Losing While Winning

Surprised couple

It’s always exciting to win a prize, no matter how small it is. Winning a big prize can be so mind-boggling that you can overlook a few important details. One of them is taxes. When deciding what to spend your unexpected money on, forgetting about taxes can do you a disservice. In just a few months, you may be hit by a truly unanticipated expense.

The IRS is waiting for you to share your prize with it. No matter how unfair it might seem, this is the USA law and you must abide. All sweepstakes prizes are subject to taxation regardless of their size and type. For example, if you win a TV, you have to pay the same amount of taxes you would in case you’d have won its cash equivalent. Here are a few points to clarify the sweepstakes tax paying process.

 

 

Debugging The $600 Myth

Many people mistakenly believe that if they’ve won less than $600, they don’t have to pay taxes. In reality, ALL prizes are subject to taxation. If the prize is lower than $600, the contest sponsor may not report it on the 1099 form. But you still need to report the winnings and pay the taxes. So don’t count on the IRS to do the job for you. Always be ready to report.

 

Important: Even though the sponsors are obliged to file a 1099 form for prizes over $600, it doesn’t mean they won’t do it for prizes under $600. In case a sponsor files a form and you fail to include the winnings in your tax form, you may be in some serious trouble with the IRS.

The girl is studying a tax return

 

 

 

 

 

 

Prizes Are Income

Even though you didn’t put in too much effort to earn a prize, it’s counted as part of your income. Meaning, in order to calculate how much taxes you owe, you have to add the prize amount to your regular income from other sources. You may get lucky and win a prize from a sponsor, who is ready to cover the taxes. But don’t forget, anything a sponsor adds to the prize is taxable as well.

 

Important: If your winnings are substantial, they could bring you into a higher tax bracket. The boosted federal adjusted gross income may increase your taxable state income.

 

Paying State Sweepstakes Taxes

If you are lucky enough to live in the below states, you don’t have to pay state taxes on the sweepstakes:

 

  • Alaska
  • California
  • Delaware
  • Nevada
  • New Hampshire
  • Pennsylvania
  • Tennessee
  • Texas
  • South Dakota
  • Wyoming
  • Washington

 

If you live in the rest of the 39 states, your prizes are subject to taxation.

 

Important: In case the sweepstakes are located in a taxable state, your residence in the non-taxable state may not excuse you from filing a tax form.

 

Withholding vs. Paying

If you win more than $5,000 in cash, the sponsor will withhold 25% for the federal taxes. The state taxes withholding is optional. However, in case you win a non-cash prize (over $5,000), such as a car or a trip, you may need to pay the taxes BEFORE you get the prize. For example, if you win a $7,000-holiday package, you’ll need to hand the sponsor $1,750 before you can get your hands on the tickets. The state taxes may also need to be paid in advance.

 

Important: The only authority you should pay the taxes to is the IRS. In case the sponsor requires you to pay any amount to them before giving you the prize, it might be a scam.

 

Evaluating The Non-Cash Prize Value

If you win a non-cash prize, how can you calculate its value for tax payment? You should take the fair market value of the prize. However, there is no precise law helping you determine what the fair market value really is. If you ask the sponsor to name the value, you may get an amount, which is different from reality. For example, at the time when the contest started, the value of the prize may be different from the time it ended.

 

Important: You can always dispute the fair market value declared by the sponsor.

 

Knowing The Exemptions

You can be exempt from paying taxes if you get the prize as a recognition for a personal achievement. You can also donate the prize to charity. However, you won’t get a charitable donation deduction. Contact your state tax authority for clarification if you believe the prize is subject to an exemption.

 

Important: If you refuse to accept the prize, you don’t need to pay any taxes.

 

Tracking Your Prizes

If you are participating in many contests, lotteries, etc. you must keep track of your winnings. Besides recording all your prizes, don’t forget about noting their fair market value. When the time comes to filing taxes, it’s easy to overlook the differences in value as well as the small prize amounts. In case your fair market value differs from what the sponsor filed in the in the 1099 form, you’d have to prove why your value should be considered.

Important: Forgetting to include even the smallest prize may lead to problems with the IRS. Start tracking early.

The guy hopes to win

 

 

 

 

 

 

Asking For Help

If you have any questions about filling out your tax form due to numerous winnings, it’s vital that you ask for professional assistance. Mistakes on the form can lead to paying more taxes than you really owe.

Important: You don’t have to hire a tax professional to fill the form out for you. Find someone who can make a quick review.

Always calculate the taxes you may be forced to pay BEFORE you enter a contest. Do you have sufficient funds to pay the taxes in order to claim the non-cash prize? It’s better to avoid entering sweepstakes altogether than struggling to find money once the prize is awarded

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