Don’t worry, it’s not all bad news. We’ll go over the ins and outs of how game show winnings work and make sure you’re fully prepared for when lady luck comes knocking.
Taxes on winnings
Winning taxes are considered ordinary income by the U.S. federal government. This is regardless of the amount won from prizes, awards, sweepstakes, raffles, lotteries, or similar income sources. This holds even if the winner did not actively participate in the contest. State taxes may also apply, except in states that don’t have a state-level income tax.
Winning at least $600 is likely to result in a 1099-MISC tax form being sent by the awarding entity to both the winner and the IRS. If no form is received, the winner must still report the winnings value. Merchandise won is also subject to taxation. The amount of tax owed depends on the winner’s place of residence and the amount won. Federal taxes must be paid. However, some states without an income tax may provide some relief.
How much will be taxed?
- IRS taxation of game show winnings in the US:
- A 1099-MISC form will likely be sent to you and the IRS by the awarding entity if your winnings are at least $600.
- The IRS imposes a 30% withholding tax on the gross value of the prize, similar to lottery winnings.
- Reclaiming withholding tax for non-US residents:
- Part or all of the 30% withholding tax may be recovered by offsetting it with gaming losses incurred in the same year.
- Involves navigating the US tax system and filling out the appropriate forms, such as Form 1040NR and 1042-S.
- Requires providing US gaming documentation from the same calendar year.
Non-cash prize game show winners
Winning non-cash prizes can come with some unwanted consequences, like having to pay taxes on their fair market value. But here’s the catch, game shows often value prizes at the highest retail price, not what it would actually sell for. For instance, a trip could be valued at top dollar, not the discounted rate you could get from a travel agent or online.
This could leave the winner with a huge tax bill they can’t afford and penalties from the IRS if they can’t pay it. To dodge this issue, one option is to decline the non-cash prize, or if it’s something easy to sell, sell it (but not to a relative or friend). But beware, if you plan on reselling the item, you might end up paying taxes on a value you can’t recoup, leaving you with less profits.
Taxes on gambling winnings
Winnings from game shows and gambling must be reported to the IRS as income. However, there is a silver lining for those who participate in the lottery or casino gambling. If you end up with a net win, you can deduct your losses, but only under certain conditions. To qualify, your winnings must exceed your losses. For example, if you spent $200 on lottery tickets and won $4,000, only $3,800 would be considered taxable income. To take advantage of this deduction, you must itemize your deductions using Schedule A on your tax return. Keep all relevant documentation, such as lottery tickets and casino receipts, in case of an audit.
Tips to manage game show winnings
- Pay taxes: Remember to pay any applicable taxes on your prize as soon as possible to avoid penalties.
- Choose cash over objects: If you have the option, choose cash instead of an object. If you win a $15,000 vacation, ask if you can have the money to avoid paying a large tax bill on a supposedly ‘free’ trip.
- Know the true value of your prize: The entity giving you the prize may inflate the value for their benefit. Make sure you know the true value and contest it if necessary.
- Consider declining a prize: If you win a prize that comes with a large tax bill, consider declining it if you are not financially able to pay the taxes. The real reward may come from walking away.
- Use cash prizes to cover tax bills: Cash prizes can cover associated tax bills. But it may not be worth the trouble if you have to scrounge for cash to pay the taxes on objects or vacations.
It’s a good idea to speak with a tax professional to determine if estimated tax payments are necessary. The payer may not need to withhold income taxes from your winnings. However, once the tax implications are taken care of, you may still have enough winnings left to shop.