Winning prize money is exciting, but the prize comes at a cost. The Internal Revenue Service taxes your income, regardless of how you earn it. This includes all wages, gifts and prize winnings. When you receive prize money, you should calculate your tax on the money and put aside enough to cover the tax bill. It is all but impossible to determine the exact tax on the prize itself because so much depends on how much income you earn, your filing status, how many dependents you can claim, and other factors. However, you can estimate the total tax on your annual income to ensure you put aside enough to cover the extra income.
Gather all your income information, including bank statements and pay stubs, and calculate your estimated income for the year. For example, if you are a salaried employee and earned $54,000 by the end of June, you can expect to double that figure for an income of $108,000 for the year. If you do not have all of the income statements for the current year, multiply your total monthly income by 12 to determine your estimated annual income.
Add the amount of your prize money to your estimated annual income. If the prize was not a cash prize, determine the fair market value of the item and add that amount to your estimated annual income. Using the previous example, if your annual income is $108,000 and you won $10,000, your total estimated income is $118,000.
Subtract the standard deduction from your estimated annual income. The standard deduction is based on your filing status, which changes each year to reflect inflation. For the 2012 tax year, the standard deduction is $5,800 for a single or married filing separately taxpayer, $11,600 for married filing jointly or a qualifying widow, and $8,500 for head of household. If you’re married filing jointly and had a total estimated income of $118,000, your adjusted gross income is $106,400 ($118,000 minus $11,600). For more information on standard deduction rates, refer to IRS Publication 501's Standard Deduction Chart.
Multiply your number of exemptions by the current exemption rate to calculate your exemption deduction. An exemption includes you, your spouse and your dependents. If you’re married with two children, you have four exemptions. As of 2012, the exemption rate for each qualifying individual is $3,700. If you have four exemptions, your exemption deduction is $14,800. For more information on the current standard deduction rate, refer to IRS Publication 501's section on Exemptions.
Subtract your exemption deduction from your adjusted gross income to determine your taxable income. Using the previous example, your taxable income is $91,600, or $106,400 minus $14,800. This is the income that the IRS will use to determine your tax.
Compare your taxable income to the tax table on IRS Publication 17 to determine your tax. Locate the table that includes your taxable income. Find the appropriate line that includes your income and slide over to the column that pertains to your filing status. The amount listed in the table is the tax that you will owe on your income. Using the previous example, with a taxable income of $91,600 and a married filing jointly status, your tax obligation is $15,156.
Estimate your income federal income tax withholding for the year using the information included on your most recent pay stub. If it is June and you have already had $5,600 withheld from your paycheck, you can estimate that you will have $11,200 withheld for the year.
Subtract your estimated annual withholdings from your tax to determine how much of your prize money you should set aside for income taxes. Using the previous example, if you estimate to have $11,200 withheld and you owe $15,156, you should set aside $3,956 ($15,156 minus $11,200) to cover taxes on the prize money.
- If you own a business and expect a loss for the year, subtract your estimated loss from your adjusted gross income before determining your tax.
- Your final tax obligation will vary based on a number of factors, including whether you own a home, how much you earned on interest and investments during the year, how much you donated to charity, and whether you qualify for tax credits such as the Earned Income Credit or Child Tax Credit.
- Ablestock.com/AbleStock.com/Getty Images
- How to Calculate Monthly Income Tax
- Penalties of Non-Payment of Property Tax
- How to Calculate a Property Tax Percentage Increase
- How to Calculate After-Tax Yield
- How to Calculate Florida Sales Tax on a Motor Vehicle Purchase
- How Do I Calculate Taxes on Prize Money?
- How Are Taxes Calculated with an Early Withdrawal From a TSP?
- How to Calculate the Taxes on Overtime
- How to Determine Take Home-Pay from Gross Income
- What Are the Tax Consequences of Quitclaiming a Deed to My Son?