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Can I write off prizes on my taxes?

Quick Answer

In most cases, prizes and awards received from contests, game shows, lottery winnings, and other competitions are considered taxable income by the IRS. This means you must report the fair market value of any prizes you win on your tax return and may owe taxes on the additional income.

However, there are some exceptions. Small prizes under $600 in value typically don’t need to be reported. Certain types of awards and prizes may qualify for tax-exempt treatment. Itemizing deductions on your taxes also allows you to write off some miscellaneous expenses related to winning prizes.

Do You Have to Pay Taxes on Prizes?

The general rule is that any prize or award you win is considered taxable income under federal tax laws. This includes cash prizes, vacations and trips, cars, electronics, gift cards, and any other items you receive for winning a contest, lottery, game show, or other competitive event.

According to the IRS, “Winnings from sweepstakes, raffles, lotteries and gambling are taxable as income and you must report winnings as income on your federal income tax return.”

The fair market value of the prize determines the amount of additional income you must report. This is the same amount you would have had to pay to purchase the item in an ordinary transaction.

For cash prizes and gift cards, the amount is simple to determine. For non-cash prizes like cars and vacations, you’ll need to estimate the value. This may require some research into the retail cost of the item if it was purchased new.

Tax Forms for Reporting Prizes

You report prize winnings as “other income” on your annual tax return. The exact form will depend on the type of return you file:

  • Form 1040 – Report on line 21 of your personal federal income tax return.
  • Form 1040-SR – Same as the regular 1040, report on line 21.
  • Form 1040-NR – Report on line 21 of the return for nonresident aliens.
  • Form 1040-NR-EZ – Report on line 11 of this simplified nonresident return.

Any taxes withheld from your prize will also be reported on your tax return so you receive credit for them.

For very large prizes, you may need to make quarterly estimated tax payments to stay current on your tax obligation. The tax on prizes can’t be offset by withholding from your regular job or pension income. Failing to stay current could potentially subject you to penalties for underpayment of estimated taxes.

Are Small Prizes Taxable?

Winning small prizes during the year usually doesn’t trigger any tax consequences or reporting requirements. The IRS makes an exception for prizes or awards valued at $600 or less.

According to IRS Publication 525:

“In most cases, you do not include small cash awards with items bought from you in your income. These awards usually are tokens of recognition or expressions of gratitude. However, you must include the prize money in your income if you were selected to get it without entering a contest or drawing.”

This generally applies to prizes like a free appetizer at a restaurant for being the 1 millionth customer or a gift card from a local retailer for taking a customer survey. As long as the prize is $600 or under, you don’t have to worry about reporting it or paying taxes.

Example

For example, say you win a $50 restaurant gift card for leaving a positive online review. The prize is worth less than $600 so you can exclude it from your taxable income.

However, if you win a $750 voucher for electronics for answering a radio station survey, you’ll need to report the fair market value of $750 as other taxable income. Even though the voucher isn’t cash, it’s still worth more than $600.

Are Game Show Prizes Taxable?

Winning prizes on game shows like Wheel of Fortune, Jeopardy!, The Price is Right, and others is a thrilling experience. But before you get too excited, remember that taxes will be owed on those winnings.

Any prizes you win on game shows – cash, cars, vacations, etc. – must be reported as taxable income regardless of value. The same tax rules apply to these winnings as any other type of prize.

Game show winnings often exceed $600, so you’ll receive a Form 1099-MISC summarizing your total prizes won from the show. You’ll need to report this amount on your tax return. Withholdings are typically taken out of cash prizes over a certain dollar amount.

One advantage is that if you receive non-cash prizes like a car, you may be able to deduct expenses related to the prize. See more on miscellaneous deductions below.

Example

For example, say you win $5,000 in cash and a car valued at $20,000 on a game show. Here are the tax consequences:

  • You’ll receive a Form 1099-MISC showing prize winnings of $25,000.
  • Report the $25,000 on line 21 of your Form 1040.
  • Taxes were likely already withheld from the cash prize so make sure to claim that tax credit.
  • You may be able to deduct expenses related to the car such as sales tax and registration fees.

Are Lottery Winnings Taxed?

Playing the lottery is fun, but if you’re lucky enough to win a major lottery jackpot the fun comes with a big tax bill. All lottery winnings and gambling winnings in general are viewed as taxable income.

For a big jackpot worth hundreds of millions, the IRS will take a share right off the top. A mandatory 24% federal tax withholding applies to lottery winnings over $5,000. State taxes may also be withheld depending on where you purchased the ticket.

As with other prizes, you’ll receive a Form W-2G from the lottery commission reporting the amount won and any tax withheld. Don’t forget to report the income on your tax return to account for the withholdings.

One piece of good news is that if you take the lump sum rather than the annuity you can deduct a portion of the lottery tax every year. This is handled the same way as the deduction for gambling losses discussed next.

Can You Deduct Gambling Losses Against Winnings?

If you’re a frequent gambler, you may be able to deduct gambling losses to help offset some of the taxes on your winnings. This includes losses from casinos, horse racing, slots, lottery tickets, and other legal gambling activities.

The deduction for gambling losses is claimed as a miscellaneous itemized deduction on Schedule A of your Form 1040. You can deduct losses up to the amount of your total gambling winnings for the year.

For example, say you have slot machine winnings of $5,000 and $3,000 of documented slot losses. You can deduct $3,000 to lower your total taxable gambling income to $2,000.

Or if you had total winnings from all forms of gambling of $10,000 and total losses of $12,000, your loss deduction would max out at $10,000 – you can’t deduct more losses than winnings.

A few important notes on deducting gambling losses:

  • You must itemize deductions to claim this write-off.
  • Keep detailed records of losses such as tickets, statements, receipts.
  • Only deduct losses for the current tax year.
  • The deduction applies per person, not per tax return.

Deducting losses provides a tax benefit for frequent gamblers who win and lose money regularly during the year. Keeping careful logs of all your gambling activities is required if you want to utilize this deduction.

Are Awards and Prizes Taxable?

Beyond contests, game shows, and lotteries, sometimes you may win special awards, prizes, or honors in your industry or field. Are these taxable? It depends on the nature of the award.

Taxable awards – These must be reported as income:

  • Cash awards for professional excellence
  • Prizes rewarding past achievements
  • Awards tied to future performance requirements
  • Honorariums for speaking engagements

Tax-exempt awards – These can generally be excluded:

  • Nobel prize and similar scientific/scholarly awards
  • Pulitzer prize for literary excellence
  • Awards for religious, charitable, scientific, educational, artistic, or literary achievement where the recipient was selected without entering a contest or applying.

Whether an award is taxable or not depends on whether it meets the requirements for exclusion under section 74 of the tax code. Significant achievement in the recipient’s field and selection without the need to enter a contest are key factors.

Some additional examples:

  • Academy Awards like an Oscar are taxable.
  • A lifetime achievement award from a professional group is likely taxable.
  • The Alternative Nobel Prize award recognizing humanitarian efforts is exempt.

Example

For example, say you win a $10,000 cash prize from an industry trade group recognizing an outstanding career in your field. Here’s how to determine if it’s taxable:

  • It’s a cash award (taxable).
  • Honors past career achievements (potentially taxable).
  • You didn’t have to enter a contest or apply for consideration.

In this situation, the award doesn’t satisfy the tax exemption requirements under IRS section 74 so you’ll need to report the $10,000 as taxable income.

Are Scholarships and Grants Taxable?

If you’re a student who receives money to help pay for college costs, do scholarships and grants count as taxable prize income?

The general rule is no, tax-free scholarships and grants do not need to be reported as income as long as you meet the qualifications:

  • You’re a candidate for a degree at an eligible educational institution.
  • The funds you receive are used to pay qualified education expenses such as tuition, fees, books, supplies, and equipment required for enrollment or attendance at the school.

As long as the scholarship or grant proceeds are used for qualified education expenses for an eligible student, they can be excluded from your taxable income.

However, there are some exceptions where scholarship and grant money does become taxable:

  • Amounts used for non-qualified costs like room and board
  • Funds that exceed the amount of qualified education expenses
  • Scholarships awarded in exchange for teaching, research or other services
  • Pell grants (taxability depends on individual circumstances)

A good rule of thumb for students is scholarships and grants that don’t require any work or services on your part are typically tax-free. Awards that come with employment conditions or requirements are more likely to be taxable.

Example

Let’s say you receive a $5,000 academic scholarship from your school and use it to pay tuition, textbooks, and lab fees which total $4,000.

In this case, the entire $5,000 would be tax-free since you used it for qualified education expenses. If you spent $3,000 on qualified costs and $2,000 on dorm housing, the excess $2,000 for housing would become taxable income.

Can You Deduct Expenses for Non-Cash Prizes?

While income tax generally applies to any prizes and awards you receive, a nice benefit is you may be able to claim miscellaneous deductions related to certain non-cash prizes.

If you win a prize like a car, vacation, boat, RV, or other valuable item on a game show or in a lottery/sweepstakes, you can deduct associated costs for that item such as:

  • Sales tax
  • Excise tax
  • Title registration
  • License fees
  • Insurance costs

Similar rules apply if you receive a non-cash prize for achievements and accomplishments in your field. These expenses help offset the tax bite from reporting the value of the prizes as income.

To claim the deductions, you must itemize on Schedule A. And you’ll need documentation showing you paid these costs in relation to the non-cash prize received.

Example

For example, say you win a car valued at $30,000 on a game show. You paid $2,000 in sales tax when you registered the vehicle in your home state.

On your taxes, you’d report the $30,000 car as income. You can then claim the $2,000 sales tax payment as a miscellaneous deduction to reduce the net tax impact.

Income vs Gift Tax Treatment

In very limited cases, small tokens provided in recognition of achievements may qualify as excluded gifts rather than taxable prizes. But the IRS remains skeptical of attempts to classify prizes and awards as gifts to avoid income tax.

According to the IRS manual:

“Because prizes and awards are generally provided in recognition of some achievement and not merely out of detached and disinterested generosity, they are rarely gifts for purposes of section 102.”

Gift tax rules only apply in situations like an employer giving a retirement gift to a long-time employee solely out of affection, goodwill, and generosity.

But for contests, game shows, industry honors, etc. the default remains that prizes and awards are considered taxable income subject to reporting on tax returns and payment of any resulting taxes owed.

Conclusion

Winning prizes, awards, and honors can be thrilling but also creates tax consequences you need to consider. With few exceptions, the fair market value of any prize you win through a contest, lottery, game show, or competition must be reported as taxable income. Small token prizes under $600 in value are generally exempt.

Prizes won through gambling can have losses deducted against them as an itemized deduction. Non-cash prizes allow you to deduct related expenses. And achieving prestigious awards in your career field may qualify for income tax exclusion in some cases.

Keeping good records is key to properly reporting prizes and deducting related costs. With proper documentation and tax reporting, you can enjoy the perks of winning while also minimizing the tax impact.