Are Prizes and Awards Taxable?

As I was entering the HGTV Dream Home Giveaway (the only sweepstakes that I enter regularly, can’t help it, these homes are so beautiful!), I wondered how I would pay the taxes if I actually won.

According to the IRS, awards, prizes, contest winnings and gambling proceeds (including lotteries) are taxable income which must be reported on Form 1040.  Which means if I am lucky enough to win the gorgeous HGTV Dream Home in Sonoma California, then I have to come up with the money to pay taxes on the value of the home and other prizes included.  Bummer, huh?

If you win a cash prize, such as gambling winnings or the lottery, sure it’s a bummer to pay the taxes, but at least you have the cash to do so.

When you win a non-cash prize, such as a vacation, a new car, or a house (such as in the case of the HGTV Dream Home Giveaway), then paying the taxes is an even bigger challenge because you have to come up with the cash to do so.

For many people it’s difficult to come up with the cash needed to pay for a non-cash prize and as a result they have to sell the prize just to pay the taxes.  This has been true for every winner of the HGTV Dream Home so far (this is the 11th year they have held this giveaway).  The value of the homes given away are usually in excess of $1 million, so you can see why someone would have difficulty paying the taxes without selling the house.  Unfortunately, I would be in the same boat, but I sure would enjoy vacationing in the house before I sell it!

Bottom line, if you are lucky enough to win a prize or award, whether it’s cash or non-cash, just be aware that you will have to include the value of that award in your taxable income, and you will have to come up with the cash to pay those taxes.  Prizes and awards are reported as Miscellaneous Income on line 21 of Form 1040; the taxes will depend on what tax bracket you fall into.  If the prize or award is substantial it could push you into a higher tax bracket (for example a senior citizen who’s only income is Social Security is usually in the lowest tax bracket, but a $50,000 jackpot at the casino could push her into the 15% tax bracket and cause some of her Social Security to be taxable).

One final note: if you have gambling winnings, you are allowed to deduct losses up to the amount of your winnings as a miscellaneous deduction on Schedule A – Itemized Deductions.

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