As with most types of income, the government wants its share of prize winnings. Some exceptions apply, but typically, if you win a prize, you have to report it on your income tax return and pay taxes on your winnings. If you live in a state that collects state income taxes, you must report your winnings on your state return as well as your federal return.
Monetary Limits and Exceptions
According to the Internal Revenue Service, a common misconception about income is that if it is less than $600 from one source, it is not taxable. The only prizes that are not taxable are non-cash gifts of personal property with a value of $74 or less. For example, if you win a $30 ham from a grocery store raffle, you do not have to report it as income. However, if you win a $30 gift certificate, you must report the prize on your taxes.
Typically, the organization awarding a prize worth $600 or more must withhold 30 percent of the winnings to cover 25 percent in federal taxes and 5 percent in state taxes. In the case of raffle prizes or gambling winnings, you may be subject to backup withholding of 28 percent if the prize is worth more than 300 times what you paid to be eligible for the prize if you do not give the awarding organization your taxpayer identification number.
Reporting Your Earnings
Gambling institutions and raffle organizers issue Form W-2G to winners. Other organizations, such as businesses that offer contest prizes, must provide winners with Form 1099-MISC reporting the value of the prize. You must report the fair-market value of winnings on your tax return. Report the income on Line 21 on Form 1040. According to the IRS, taxpayers with miscellaneous income must use Form 1040 to file their taxes. Report any withholding on Line 64.
According to the Bankrate website, comparing the value of a prize listed on the 1099-MISC form to actual store prices can save you money on your taxes. Prize issuers typically use the prize's suggested retail value on the 1099. If you see an advertisement for a lower price within 30 days of receiving the form, send it to the issuer with a request for an updated form. Taxpayers who do not accurately report winnings are subject to an underpayment penalty of 20 percent of the unreported amount.