Winning a prize is certainly exciting, but that windfall comes with a price. In most cases you will owe taxes on the money you won in the event of a cash prize or on the value of the merchandise in the event of a non-cash prize. As soon as the excitement of the big win wears off, it is a good idea to sit down with a pen and pencil, or better yet with your favourite tax preparation software, and calculate your potential tax bill. This will give you time to set the money aside and settle up with Uncle Sam before April 15 rolls around.
Gather all of your income information, including your pay stubs, bank statements and brokerage statements. Calculate your expected earnings for the year based on the information you have. You can, for instance, extrapolate your yearly income by multiplying the gross pay on your last pay stub by the number of yearly pay periods.
Add up all of your expected income, then add the amount of your cash prize or the value of your non-cash prize. To calculate your taxes you will first need to total your income.
Log on to your computer and go to the IRS website to determine the tax bracket for your income. Multiply your tax bracket by the amount of your prize--this is the highest amount of taxes you would owe. Luckily the actual amount will probably be lower, due to the standard deduction, personal exemptions and other adjustments.
Open your favourite tax preparation software package and plug the numbers in, just as if you were doing your tax return. These tax prep programs are excellent tax planning tools--they can give you a real sense of what you are likely to owe when you actually file your taxes.
Enter information about any taxes you have already paid, including any estimated tax payments and withholding from your paycheck. This will give you a more accurate picture of any extra taxes you may owe as a result of your good fortune.
Things you need
- Internet access
- Tax preparation software
- Income records