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Tax Treatment of Prizes and Awards

August 3, 2006

Charity Awards

You just received an award for outstanding Father of the year for all the work you do in your community by a local charity. The award includes civic recognition, a nicely framed plaque, gift certificates to local stores and a cash payment of $1,000. Surprise! This cash award (and even the value of the gifts certificates) may be subject to tax. The charity is required to report your winnings (if they are over $600) on Form 1099-MISC and send a copy of this to you and to the IRS.

There is one exception to this rule. If you don’t take the cash, and instead ask for it to be paid directly to a charity, you will not have income and subsequently won’t be taxed or receive a Form 1099-MISC from the organization that gave you the award. However, this does not mean you get a charitable contribution deduction. Why? Because you must make the charitable contribution deduction using “after tax dollars” and this award was never taxed to you.

Here is the other catch, the check has to be cut to the charity. Accepting the check in your name and then turning around and making a charitable contribution can actually cause you to pay taxes. Why? Because the amount you claim as income for the award may be greater than the amount you can deduct as a charitable contribution; thanks to limits on these contributions and on itemized deductions. So it’s not an exact match. You may bring in $1 of income but only get to deduct 80 cents.

Raffles and Bingos

Do you have the “Midas Touch” (…everything you touch turns to gold? Midnight Star, 1986). If so, I would like to congratulate you. I hate to rain on your parade, but the Tax Man may be knocking at your door if you don’t include these winnings in your taxable income.

You have to include all of your gambling winning in income. Gambling income includes all your winnings from virtually anything that you put a wager on; such as, Keno, slot machines, table games ( i.e., twenty-one, black jack, craps, poker, baccarat, roulette, and wheel of fortune), bingo, racing and lotteries. It may also include raffles.

What about gambling losses? They can be deducted as miscellaneous itemized expenses, but in many cases, you probably won’t be able to deduct the full value of these gambling losses.

To make matters even worse, not all expenses that you pay are gambling losses and in fact, they may not even be deductible. Take the case of a raffle. Assume that you just won the grand prize at your annual sorority fundraiser; a 7 day, 6 night vacation for two, worth $6,000 at an all-inclusive resort in San Tropez to “watch a brotha play a mandalay” (“I Need A Girl (Part Two),” P. Diddy, featuring Loon, Ginuwine & Mario Winans, 2002). You paid $100 for the raffle ticket. What’s the catch? With most of these prizes, your airfare, hotel and food costs are covered, but you still have to pay the sales taxes and transportation-related fees; in this case, you will have to come out of pocket approximately $750 for your “free” vacation.

And that’s not all. Don’t forget you will have to report your “free” vacation on your tax return. How much do you need to report in income? If you guessed $5,150 ($6,000 minus $100 minus $750) you’re wrong. The entire cost of the prize, the whole $6,000 must be included in your income. Assuming a 20% effective tax rate, this could be an additional $1,200 in taxes.

How is this possible? Your gambling expenses only include the cost of the raffle ticket, or $100. The $750 that you paid in state sales taxes and transportation related fees does not count as gambling expenses. (Note, the state sales taxes may be deductible as an itemized deduction).

Finally, remember that the gambling establishments, (which can include a charity who sponsors a raffle), are required to report your gambling winnings over $600 to the IRS ($1,200 for winnings from bingo or slot machines and $1,500 for winning from Keno) on Form W2-G, Certain Gambling Winnings and if you win more than $5,000, they must withhold taxes from your winning (i.e., to the tune of 25% to 28%).

So the next time you shout “I’m a Winner,” (Diana Ross, 1971), at the Casino or Church Bingo game, be aware that you may have also hit the tax “lottery” too.

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