Did You Win Big? Uncle Sam Wants His Share
Big or small, each prize earning is fully taxable. Whether you win big on the Price is Right or $500 at the local Bingo hall, the IRS has been collecting taxes on prizes and awards since 1986.
June 24, 2014 (Newswire.com) -
Big or small, each prize earning is fully taxable
Jeffrey S. Freeman, J.D., LL.M
Between NBA Playoffs and the Kentucky Derby, May might have been the lucky month for your pocketbook. Nearly 165,000 watched as California Chrome raced to victory, earning his owners more than $1.2 million. Those earnings are fully taxable, but so are the all the earnings won by the gambling crowds.
Whether you win big on the Price is Right or $500 at the local Bingo hall, the IRS has been collecting taxes on prizes and awards since 1986. The rules are very clear that regardless of how you won or came to receive the prize it is fully taxable. For merchandise or products you must also report the fair market value.
Depending on the size of your winnings you may be provided with a Form W-2G for gambling withholdings. Some establishments may withhold income taxes from the payment. Regardless you are required to report the income on Form 1040, Line 21 under other income. In some rarer cases you may be required to pay estimated taxes on your winnings, which means you are not able to wait until next April rolls around to pay your taxes.
A silver lining exists that even the casual gambler should be aware of - you can deduct your gambling losses for the year on line 28 of Schedule A, Form 1040. In order to deduct your losses you must be able to provide receipts, tickets, statements or other records to clearly show the amount of the winnings and losses. This is why most people cannot utilize this, because they do not have documentation. So start now, keep a diary of your bets, wins, and losses. Once you have an accurate record you can deduct losses as long as they are not more than your winnings.
Even if you are not planning on winning big having your gambling losses could help offset your winnings if you do happen to strike it rich.
Remember, that donations to charity do not eliminate your tax responsibility on prize money, it could actually make your tax problem worse. If you decline a prize you can avoid all taxes, but once you accept a prize you are responsible for the taxes even if you then donate it to charity later.
You can only claim charitable contributions for up to 50% of your "contribution base" (typically your adjusted gross income) or 30% for certain private non-operating foundations, veterans organizations, fraternal societies and nonprofit cemeteries. You are able to carry over excess contribution deductions for up to five years, but you are still paying tax on money that you've given away.
If you are concerned about your tax compliance on past prize winnings or current donations do not hesitate to contact Freeman Tax Law.
About Freeman Tax Law
Freeman Tax Law is a boutique tax law firm with national exposure with the expertise and professional staff equipped to handle all domestic and international tax law matters. At Freeman Tax Law, the attorneys and professional team have vast experience with foreign tax compliance, international tax planning, and resolving tax controversies involving offshore banking matters. Freeman Tax Law helps taxpayers and foreign entities become in compliance with laws such as Foreign Account Tax Compliance Act (FATCA) and Offshore Voluntary Disclosure Program (OVDP). In addition to handling complex tax controversies, the Freeman Tax Law team has extensive expertise in assisting clients with wealth management and estate planning.
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