Everyone’s waiting for their ship to come in – or their numbers to come up in a game or lottery. The odds are usually against you, so when you win something it’s an exciting day. Before celebrating too much, however, keep in mind that you’ll have to pay taxes on the value of those winnings. It’s not just the federal government that wants its share; your state or the state in which the prize was won likely wants some tax revenue from your good luck as well. At the federal level, you’ll owe taxes based on your income bracket, so a big prize can push you into a higher bracket for all of your taxable earnings. Report your winnings on your federal income tax return Form 1040 on line 21. The amount you must pay in state taxes on your winnings depends on your state and the state in which the prize was issued. Contact the departments of revenue in the relevant states to find out how much you owe.
Winning Cash Prizes
Nothing compares to winning cash. Not only can you do anything you want with the money, but you can use your winnings to pay the taxes owed, which isn’t the case when you win a car, boat or other big-ticket item. Calculate how much you owe by first figuring out your taxable income for the year, both earned and unearned. From there, see where you fall in the federal tax bracket. At that point, add in your winnings to see if your tax bracket changes. For example, if you're in the 15 percent bracket but your winnings moved you to the 25 percent bracket, you’ll end up paying a 25 percent rate on your total income, not just on the cash prize. If your winnings didn’t move you out of the 15 percent bracket, that’s what you'll pay on your prize money.
The downside of winning a high-priced item, like a car, is that you may have to sell it to pay the taxes or dip into savings intended for other purposes. You will have to pay tax on the fair market value of the item, so if you won a $50,000 car, you'll owe taxes on that amount. The company providing the winning item should send you a Form 1099 with its fair market value. Again, the prize may move you into a higher tax bracket, so make the same computations as if it were cash. For example, if you are in the 28 percent tax bracket with the car included, a bracket that currently ranges from $91,900 to $191,650, you’d pay $18,713.75 plus 28 percent of the excess over $91,900 for tax year 2017.
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Gambling Winnings and Losses
If you won prizes through gambling, such as casino games, horse racing, slot machines or the lottery, you can offset some of the tax on your winnings if you also have gambling losses during the year. Gambling losses are included on Form 1040, Scheduled A, as itemized deductions. You should receive Form W-2G - Certain Gambling Winnings or Form 5754 - Statement by Person(s) Receiving Gambling Winnings from the gambling entity. Keep all gaming receipts, including wagering tickets. For example, if you won a lottery game, keep a record of all your ticket purchases and amounts won and lost. If you’re a racing fan, keep a race record and accounts of your wagers, along with your wins and losses. When playing table games, record all your winnings and losses, as well as the table number at which you played.
Note: If your gambling losses exceed your winnings, you’re out of luck. You can only claim losses up to the amount of your winnings.
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