Winning a cash prize from a raffle, quiz show or some other event can be an exiting experience, but it is important not to spend the full amount of your winnings. The IRS taxes prizes won just like any other source of income. According to the IRS, prize money won must be reported on line 21 of the standard 1040 tax form as "other income." The total amount of tax you will have to pay on prize winnings is based on your marginal federal tax rate plus any applicable state taxes. You can calculate an estimate of the tax you will owe on a prize using your tax return from last year.
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Note your adjusted gross income (AGI) listed on your 1040 tax form from last year. This amount will be listed on line 37. If you want a more accurate calculation of the tax owed based on your income from this year, you will have to fill out a 1040 form with your income information from this year to calculate your AGI for this year.
Go the "Bankrate: 2010 tax bracket rates" site and check your marginal tax rate based on your AGI. The marginal tax rate is the rate you pay on the final dollar you make. For instance, if you make £32,500 a year as a single filer, your marginal tax rate is 25 per cent because £32,500 falls in the £22,100 to £53,560 range listed on the chart.
Multiply the prize amount by your marginal tax rate. This is the amount of federal tax you will owe on the prize. If the prize is large, some of the prize may be taxed at a higher rate. For instance, if you make £32,500 a year and you win a £32,500 prize, the prize will be taxed at 25 per cent up to £53,560, but the rest of the prize will lie in a higher tax bracket, in this case at 28 per cent.
Add your state's applicable taxes to the amount from step 3 to calculate the total amount of taxes owed on the prize. State income tax rates vary. The department of revenue website for your state should list tax rate information. For instance if your state tax rate is 5 per cent, multiply the cash prize amount by 5 per cent and then add the result to the calculation from step 3.
Tips and warnings
- Failing to report prize winnings to the IRS may result in tax penalties.
- Tax must also be paid on non-cash prizes up to the cash value of the prize. For instance, if you won a new car that is worth £9,750, you would have to pay tax on it as if you had won £9,750 in cash.
- According to Bankrate, gambling winnings are also reported on line 21 as "other income."
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