The IRS wants to celebrate with you! There are very complex, specific rules for prizes that qualify as nontaxable. In general, gifts are usually not taxable but most prizes are. And this is NOT limited to money exchanged or monetary prizes. Physical items are valued at whatever the fair market exchange rate for the item is. For example, if a luxury car is won at a raffle, it must be reported at it’s fair market value OR the value it is given at the raffle. Often, it is valued higher so the company giving it away can have a bigger write-off. When this income for the value of the car is reported; it can push the taxpayer into a higher tax bracket eliminating other tax benefits like certain child tax credits and resulting in a higher tax rate. If the company doing the giveaway pays the tax for you, you must then report that tax as income too.
Some prizes that are occasionally tax-free are for acheivements in the religious, scientific, artistic, educational, literary, charitable or civic fields. The Pulitzer Prize and Nobel Prize are considered tax-free.
Prizes and rewards are usually reported by a 1099 sent to the recipient in January of the next year.
So, if you receive anything, monetary or otherwise first determine if it is a gift or a prize. Then document where it came from, why you got it and all other information you have and consult a tax professional. Just because you do not get a tax form in the mail, that does not eliminate your responsibility to report what is taxable as far as the IRS is concerned.
-Laura R Fleig
Fleig Financials, LLC
