It can be exciting to win anything from a raffle prize to much larger winnings like vehicles and electronics. However, even these non-cash items that you win are taxed by the IRS. These items are taxed at your normal tax rate for the estimated value of the item at the time of winning. In many cases the organization that gives the prize will be reporting your win to the IRS. Then if you fail to report this on your taxes and thus pay your portion in taxes on the prize, you may find yourself being hit with a penalty and audit from the IRS.
A Hudson resident was so excited to win a brand-new car in a local giveaway. However, the shock came when she discovered that she would have to pay taxes on the value of the vehicle. This added up to a significant amount of money that she had not anticipated owing to the IRS.
Reporting Your Winnings on Your Tax Return
Whether a cash windfall or some other item of significant value, you will need to report this win on your taxes using IRS Form 1099-MISC. While cash won is very straightforward, taxed at your regular rate, a non-cash win can be a little bit trickier. The items that you win will be taxed at their estimated value. For larger items, the amount of tax owed can be quite substantial and burdensome when you have to pay the tax money. When you win a high-value non-cash item, you will want to make sure you take the tax implications into consideration.
Ways to Reduce the Tax Burden of Your Non-Cash Winnings
Winning is great, but if it isn’t something that you want or need it can feel more like a detriment when you have to pay taxes than an actual win. If this is the case, you can donate the items to charity. As long as you are itemizing your deductions, this can then be used as a charitable contribution deduction which will offset the taxes owed on the item. You can also refuse the prize. By not taking possession of the item you have won, you will have no tax obligations regarding it.
If you do find yourself on the winning end of a non-cash prize that is of significant value, it is a good idea to consult a tax professional. For the Hudson resident, the team at Merrimack Tax Associates was able to discuss the tax implications of her win and the best way to plan ahead so that there wouldn’t be any surprises from the IRS.