Scratch fever! According to the Center for Counseling & Health Resources, over two-thirds of the adult population in the United States placed some kind of a bet last year. The IRS groups all prizes, awards and lottery winnings in the same category - taxable income! Even the value of non-monetary prizes must be reported as income.
Think you're pretty lucky because you won $1000 in a radio contest? Or a cruise? Both situations can land you in a surprising tax situation at the end of the year. Most companies that award prizes valued over $600 will send the recipient a 1099-MISC with the value of the prize - but even if they don't, you are still required to report the fair-market value of the prize received. This amount must be recorded on line 21 ("Other Income") on form 1040. That means this income is not subject to self-employment tax, however, it is subject to your regular tax bracket. If you are in the the 15% or 25% tax bracket, for example, you will have to pay $150 or $250 in taxes on $1000 of prize awards.
The only saving grace with gambling winnings is that you are allowed to deduct up to your winnings when you itemize on Schedule A. For example, if you won $10,000 at the river boat but you lost $30,000 - you can only deduct $10,000 of your losses; the losses cannot exceed your winnings. Similar to prizes and awards, you must include your gambling winnings in your income on Form 1040, line 21. Be sure to save all of your lottery purchase receipts to off-set any potential winnings!
The great news is that Liberty's Expense Tracker program can also track gambling expenses.
Don't let the taxable nature of the prize stop you from playing a contest; winners still come out ahead...just don't forget to consider the tax consequences!