Uncle Sam wants slice of prize winnings
Dear Dr. Don,
I recently won a grand prize from a promotional company for a trip for two to Bora Bora for five nights. The prize is valued at $9,500. I am trying to figure out what tax I will be liable for to the Internal Revenue Service. The rules state any person winning over $600 will be reported to the IRS and I will be sent a 1099 form. Based on the valued amount of the trip, do you have any idea how much tax I will have to pay?
-- Jane Journey
Congratulations on winning the prize. I hope you enjoy (or enjoyed) your trip to Bora Bora. Now it's time to pay the piper. How much tax is owed will depend on your filing status and your marginal federal income tax bracket.
IRS Revenue Procedure 2008-66 spells out the marginal rates for the different federal income tax brackets based on your filing status. You can also approximate the number using the Bankrate calculator "What is your tax bracket?" It's only an approximation because the Bankrate calculator is still using the 2008 marginal rates. Any state or local taxes due would depend on the relevant income taxes in your state of residence.
The Bankrate feature "Good news! Not everything is taxed" has a discussion of the tax impact of prize winnings. Work with a tax professional if you're uncertain about how to account for the prize winnings at tax time.
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