How Do I Calculate Taxes on Prize Money?
Winning a prize is exciting, until you have to pay taxes on it. Prizes from sweepstakes, contests, lotteries, and gambling are treated as income. The IRS taxes prize winnings the same as any other type of income. The amount you will pay depends on your entire income for the year. Calculating your taxes now allows you to set aside the money, instead of getting hit with a shocking tax bill.
Calculate your taxable earnings for the year. Include earned and unearned sources of income.
Add your cash prize winnings to your income total. Prize winnings are included in the IRS list of "other" taxable income.
Report non-cash prizes as income. Taxes are also assessed on the fair market value of any property you won. The company or group awarding the prize will issue you a 1099 form stating the value
of the prize.
Subtract all qualifying deductions from your total income to get your adjusted gross income. If you itemize your deductions, you may be able to deduct the amount spent on lottery tickets or other losses up to the amount of your winnings.
Check your marginal tax rate based on your AGI. Depending on the value of your prize, it may bump you into a different tax bracket.
Multiply the value of your prize by your IRS tax rate to determine the amount of taxes you will pay on it. At the time of publication, tax rates ranged from 10 percent to 35 percent of your income.
Add the state taxes to the amount you are paying in federal taxes on the prize. State income tax rates vary among states. You can contact your state's department of revenue for the current income tax rate.Source: finance.zacks.com