Surprise! You won the prize
and now you owe the IRS
An Ohio man recently sported a big smile after
winning a free computer through a magazine contest. But his smile
quickly turned into a scowl after his accountant told him the bad
news -- he owed taxes on his prized electronic helper.
For many people, this news of winning something
and then owing money because of it comes as a shock.
But there are dozens of items that Uncle Sam
slaps a tax on that many people are simply unaware of, including:
- Trips or prizes won
- Stock options for employees
- Gambling winnings
- Unemployment compensation
- Some holiday gifts
- Jury fees
- Hobby income
trips still cost money
"At work, my wife won a $2,000 trip to Hawaii. We had to pay
taxes on that $2,000," says Ken Pikor, a certified financial
planner and enrolled agent (someone who can represent taxpayers
before all administrative levels of the IRS) in Westerville, Ohio.
This came as no surprise to Pikor, with his knowledge of taxes,
but that didn't make him happy about it.
One of Pikor's clients, the guy who won the
computer, wasn't happy about his bill either. But Pikor was able
to take a little bit of the sting out of the IRS' tax bite: the
computer had a manufacturer's suggested retail price of $1,995,
but it was selling locally for $1,499. Pikor helped his client prove
this to the IRS by writing a letter of explanation, and including
it and pay less
After winning some type of prize, make sure you receive Form 1099-MISC,
Miscellaneous Income, from the person or organization that's
sponsoring the event. Form 1099-MISC states the manufacturer's suggested
retail value of the gift and you're required to pay the tax on that
Tax Tip: If you can prove within 30 days
of receiving the form that the same item could have been purchased
at a lower price, you have a good shot at owing less taxes.
Pikor recommends that you clip an advertisement that shows the
lower price and keep it with your tax records.
In addition to wages, sometimes organizations compensate their employees
with the company's stock. The stock is either vested or
restricted when you receive it.
If you receive vested stock, which means that
the waiting period for a stock option to be exercised has been eliminated,
you must report compensation income equal to the value of the stock
on the date of the grant or award, even if you don't sell the stock.
Example: In August 1999, your employer awards
you 100 shares of stock worth $50 each. On your 1999 income
tax return, you must report $5,000 of compensation income because
of this award.
If you receive restricted stock, you don't have
to pay tax at the time you receive the stock. However, the amount
of tax you pay later when it vests can be significantly higher.
Tax Tip: If you think you would be better
off under the rules for vested stock, you can elect to use those
rules, but you have to file the election within 30 days after
receiving the stock.
When you end up selling the stock, you'll report
either a capital gain or loss. The gain or loss will be short-term
if you held the stock one year or less at the time of the sale.
You need to hold it at least a year and a day to have a long-term
You owe income tax if you win more than $5,000 from:
- Any sweepstakes, wagering pool or lottery,
- Any other wager if the proceeds are at least
300 times the amount of the bet.
If Lady Luck is on your side and you make that
major win, you'll receive Form W-2G from the lottery commission.
Attach it to your Form 1040 and report your winnings on line 21
of Form 1040.
To many people's dismay, taxpayers owe income tax on unemployment
benefits they receive. It stinks, but at least taxpayers have a
choice of having the income tax withheld now or paying it later.
Form W-4V must be completed. The amount withheld will be 15 percent
of each payment.
When it comes to holiday gifts, if your employer gives you an item,
such as a ham or a turkey or other merchandise of nominal value,
it's not taxable. However, if your employer gives you cash, gift
certificates or similar items of readily convertible cash value,
the value of the gift is considered to be additional wages or salary.
The gift amount would be included in your Form W-2 and would therefore
Believe it or not, fees you receive for serving on jury duty constitute
income, according to our friends at the IRS. Include the amount
on Line 21 of Form 1040.
If you enjoy tie-dying T-shirts and bed sheets at home, and selling
the goods to teenagers at rock concerts, technically, the income
made is taxable. You should report the amount on Line 21 of Form
1040. Expenses are deductible on Schedule A.
Some of the more obscure items that are deemed
- Beauty contest winnings
- Buried treasure
- Embezzlement proceeds
So if you happen to dig up a pot of gold while
doing your weekly gardening, and you don't want to get in trouble
with Uncle Sam, report it. Otherwise you could end up like gangster
Al Capone -- it was income tax evasion that finally locked him away.
-- Posted Jan. 26, 2000