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How Much State & Federal Tax Is Owed on Sweepstakes Winnings?
That winning sweepstakes entry could mean a big tax bill.
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If yous win a sweepstakes or contest prize, you volition owe income taxes to Uncle Sam and perhaps your state. Prizes are considered taxable income regardless of whether the prize is in the grade of cash, trips or merchandise. If y’all win a prize valued over $600, the sweepstakes or contest sponsor must report the value to you lot and the Internal Revenue Service on a Form 1099-MISC. You lot’re yet supposed to study and pay tax on prizes under $600.
Add-on to Income
Prizes and awards will increase your tax bill, merely the question of how much depends on the value of the winnings and the corporeality of your other income. Prizes are taxed every bit ordinary income. That means y’all add the prize value to the income you received from your job and other sources during the year. Sometimes, a sponsor volition include a greenbacks honour to assist cover taxes on the prize, just the cash also is taxable income to the winner. The prize value will increase your federal adapted gross income, which likely will increment your net taxable income afterwards you take your exemptions and deductions. The prize win could button you into a higher tax subclass. Your federal adjusted gross income is the starting point for most state income revenue enhancement returns so the value of the sweepstakes prize within your federal AGI could increase your land taxable income.
Country Taxes
Y’all will take to pay state income tax on your winnings in 39 states. If yous live in ane of the 11 states that don’t taxation sweepstakes prizes, you may be spared state income taxes. Alaska, Florida, Nevada, Due south Dakota, Tennessee, Texas, Washington and Wyoming accept no country income taxes. Additionally, California, Delaware, New Hampshire and Pennsylvania don’t taxation winnings on sweepstakes or other gambling. Just if you live in a non-taxable land and win a sweepstakes based in a taxable country, you may have to file a tax return with the taxable state where the sweepstakes is based. If you are unsure most whether you lot will owe state tax on your big win, ask your land’s tax collection bureau.
Taxation Withholding
If the sweepstakes prize is worth more than than $5,000, the sponsor must withhold 25 percent of the prize value for federal taxes and may have to withhold country taxes as well. But if the prize is a car or other expensive trade, you may exist required to give the sponsor the cash to pay the federal tax withholding before the sponsor volition release the non-cash prize to y’all. For example, if you lot won a $25,000 car, you may accept to give the sponsor $6,250 for the federal tax withholding before the sponsor volition requite you the car. You may besides have to pay state withholding upwards front. The sweepstakes sponsor could choose to pay the federal tax withholding, but if it does, the sponsor’s withholding charge per unit is 1-tertiary of the prize’s fair marketplace value.
Valuing Prizes
If your prize is a non-cash laurels such every bit a trip or a car, you will owe revenue enhancement on the fair market value of the prize. In that location is no uniform method for determining fair market place value. Neither the U.Southward. revenue enhancement code nor U.S. Taxation Court rulings have specified the proper way to set the fair market value of a non-cash prize. The sweepstakes or competition promoter will report what it considers to be off-white market value. That effigy may be different from the “approximate retail value” the sponsor cited in sweepstakes advertising. But the sponsor’s fair market value figure may be subject to dispute. For example, parties could dispute whether the fair marketplace value of an automobile is the manufacturer’s suggested retail price or the discounted price the sweepstakes sponsor paid to buy the car.
Exempt Prizes
You can avert all taxes on a prize if you lot refuse to accept information technology. A prize may not be taxable if it meets sure legal tests. To exist tax-exempt, the prize must be in recognition of personal achievement in religious, scientific, literary, artistic, charitable, educational or borough affairs. Y’all cannot have nominated yourself for the prize or submitted your ain work for review. You lot can’t be required to perform services as a status for receiving the prize. You cannot claim the prize for yourself but instead must assign the prize to clemency. If you lot assign away the prize, you don’t get a charitable donation deduction. All these tests must be met to avert taxation on the prize.
References
Writer Bio
Herb Kirchhoff has more than three decades of hands-on experience as an avid garden hobbyist and domicile handyman. Since retiring from the news concern in 2008, Kirchhoff takes care of a 12-acre rural Michigan lakefront property and applies his experience to his vegetable and flower gardens and home repair and renovation projects.
Source: https://finance.zacks.com/much-state-federal-tax-owed-sweepstakes-winnings-6171.html
