Reporting and Withholding
In general, all prizes worth more than $600 are reported to the IRS by the payer. This includes non-cash prizes such as vacations, cars or televisions. The sponsor of the prize contest must report the fair market value of any non-cash prize. Under certain conditions, the payer must also withhold money for tax purposes and file a W-2G form with the winner to report the amounts. The reporting and withholding requirements vary with the type of prize; for slot machines and bingo, for example, reporting starts at $1,200 and no withholding is required.
Prizes and Tax Brackets
You report any and all prize winnings on Line 21 of Form 1040 as miscellaneous income. The IRS wants to know about the prize even if its value doesn't meet the reporting threshold value of $600. The total prize amount is subject to income tax at your individual tax rate. It's possible to win a prize and, as a result, find yourself in a higher tax bracket on your total income -- meaning you actually have a net loss at tax time. To avoid this possibility, you can donate a portion of your winnings to something deductible -- your own IRA account in the case of cash, for example, or a qualified charity.
The IRS will not tax certain prizes if you decline them or assign them to a charity. If you do this before you receive the money, the prize is tax exempt. This covers prizes for artistic, literary or scientific accomplishment, such as the Nobel Prize. If you receive the money and donate it, however, the tax rules will limit your donation to 50 percent of your adjusted gross income.
Disputing Prize Value
If you receive a Form 1099 that overstates the value of any non-cash prize you win, you can request that the payer issue a corrected form. If that doesn't work, you can dispute the amount with a Form 4598, "Form W-2, 1098 or 1099 Not Received or Incorrect." Contact the IRS and give details on the 1099 and your own estimate of the value. The IRS will notify the payer and set a 10-day deadline for a response. If the payer does not correct the 1099, you can claim your amount and file the 4598 with your tax return.