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10. Not paying taxes on prizes

Taxes on prizes

If you won a $500,000 contest, what would you do with the winnings? First answer for most people is the same: Pay half in taxes. To quote “Fast Eddie” Felson, “Money won is twice as sweet as money earned,” but it appears the IRS doesn’t agree. Since you didn’t earn it, you don’t pay employment taxes, such as Social Security and Medicare, but you do have to pay federal income tax, plus any state and local taxes.

Prizes won in contests are assigned a dollar value that represents the fair-market value, and the issuer of the prize reports that information to the IRS. That means you pay taxes on any prize, such as a vacation, a vehicle, or a set of matching luggage. Typically, you’d receive a 1099 form from the organization awarding the prize stating its dollar value.

You need to include your prize winnings as “other” taxable income on your federal income taxes.  And don’t forget, you also have to report it on your state income tax, as well. If you fail to pay the taxes owed, you’ll receive a penalty from the IRS – in addition to whatever money you owe. Winning a prize that lightens your pockets. Seems like there ought to be a law against that.

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