It feels pretty good to win money, doesn’t it? Whether you hit it big at a casino, called into the radio at just the right time, or won a sweepstake, you earned a prize you didn’t have before. While winning these things might feel good – or incredible! – keep in mind that these prizes are taxable. If you are wondering how these prizes are taxed, read on to learn more. We at Tax Law Offices sometimes see people neglecting to claim their prize money, which can lead to an IRS tax audit. Call the IRS tax lawyers at our firm today to see how we may be able to help you.
Prize Money is the Same as Ordinary Income
The federal government typically doesn’t make a huge distinction between prize money and income. That means that prizes, raffle winnings, lottery winnings, and awards are going to be taxed the same as your monthly paycheck would be – regardless of the amount. This does not change even if you didn’t enter to win the prize. Also, keep in mind that Illinois does impose a state tax on income, so you will pay state taxes as well on your winnings.
The rate of your federal taxes is determined by your income and the corresponding tax bracket. Keep in mind that your prize money could possibly move you to a higher tax bracket, so be prepared for that.
Reporting Your Prize Money
Usually, you can expect your prize money to be reported to you in Box 3 of the 1099-MISC IRS form. This third box is labeled as “other income.” It will be reported on the tax return for the year you won, so if you win prize money in 2017, you will not report the winnings until you file your taxes next year. Since you might not be required to withhold any income taxes, you may want to talk to a tax professional. It could be advisable to make small payments to cover the taxes from the prize as time goes on instead of paying it all in one lump sum.
How to Calculate Prize Money Taxes
If you would like to feel more confident in how much you’ll need to pay when it comes time to pay your taxes, follow these steps:
- Gather all of your income information and find out what you made for the year.
- Add your prize money to this amount. If you did not win a cash prize, you may need to find out what the estimated price is of the item you won. You can find this by searching for the fair market value of your prize.
- Subtract any standard deductions from your estimated income. This is based on your filing status.
- Multiply the number of your exemptions by the current exemption rate. This will tell you your exemption deduction.
- Take away your exemption deduction from your gross income to find out what your taxable income will be.
- Look at the IRS’s tax bracket information and see where your taxable income falls on that table. This will tell you how much you can expect to pay.
From this process, you will be able to prepare for the amount of taxes the IRS will need from you. This way, you can prepare to set some money aside to account for these additional taxes. For some people, it is much easier to set aside a small amount of money each month to account for these taxes; this way, you will not be caught unaware when you file your taxes and owe several thousand dollars more than you expected.
Contact Our IRS Tax Lawyers
If you had some difficulty reporting your prize winnings and now the IRS is looking to audit you, it’s time to give Tax Law Offices a call. We proudly serve Naperville and the surrounding areas when it comes to providing tax law services. If you need to go to court or simply need legal representation to help you during this trying time, then we are the office to call. With our experience working with the IRS, we know exactly what to expect – meaning we can prepare you for everything the IRS could throw your way. Contact us today for a consultation and tell us how we may be able to help you.