Generally, you must report the amount of money or the fair market value of goods and services earned as a prize or an award. For example, if you won a cash prize at an art show, won free gasoline for a year from a radio contest, or earned an all-inclusive spa day for first place in a beauty contest, then all of those prizes are subject to income tax liability. Additionally, bonuses or awards you receive for outstanding work at your job are included in your income and your Form W-2.
This provision also applies to some prizes you would not associate with taxes. For example, a Nobel Prize winner receives a gold medal and $1.5 million that is entirely taxable under the Internal Revenue Code. The same applies to the vacations and the lavish gift bags awarded to Academy Award nominees and presenters. The Pulitzer Prize for achievements in literature and music carries a certificate, a $15,000.00 cash award and (you guessed it) a federal income tax bill. It is tempting to take the chance of not reporting the prize or award to the IRS. However, the prizegiver may have already reported it on a Form 1099-MISC as required by law if the value of the prize exceeds $600.00. You may be liable for interest and penalties if the Internal Revenue Service notices that you underreported.
How do you avoid the tax consequences of earning awards and prizes? One step that a taxpayer can make is to simply refuse the award. If there is no acceptance, then there is no income. This may be a necessary option in situations where you won a substantial non-cash prize (e.g. a new car) but don't have the ability to deduct the taxes from the item or otherwise come up with the funds.
There are certain awards and prizes that are immune from taxation:
EMPLOYEE ACHIEVEMENT AWARDS: If you receive tangible personal property (NOT cash or a cash equivalent) as an award for length of service or safety achievement, you can generally deduct it from your income. Pursuant to 26 U.S.C. §274(j):
- The award must be:
- No more than $1,600.00 ($400.00 for awards that are not qualified plans), and;
- Made as part of meaningful presentation, under conditions and circumstances that don't create a significant likelihood of it being disguised pay.
- The award cannot be:
- A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years.
- A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year.
CERTAIN PRIZES TRANSFERRED TO CHARITY: A taxpayer who receives an award such as the Nobel Prize, an Academy Award or a Pulitzer Prize can avoid taxes by assigning the prize to charity ahead of time. President Obama avoided paying federal income taxes on his Nobel Peace Prize in 2009 because he assigned the proceeds to charity before receipt. Pursuant to 26 U.S.C. §74(b), "[g]ross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if-
- The recipient was selected without any action on his part to enter the contest or proceeding;
- The recipient is not required to render substantial future services as a condition to receiving the prize or award; and
- The prize or award is transferred by the payor to an applicable governmental unit or charitable organization pursuant to a designation made by the recipient."
OLYMPIC MEDALS: Until October 7th, 2016, the value of the medal (gold, silver or bronze) and the accompanying prize money from the U.S. Olympic Committee awarded to athletes participating in the Olympic Games or Paralympic Games were fully taxable. Now, pursuant to 26 U.S.C. §74(d), the taxpayer athlete does not pay any taxes from Olympic winnings unless his or her adjusted gross income for that tax year exceeds $1,000,000.00 ($500,000.00 if married filing separately).
If you have questions about the tax treatment of a prize or an award, do not hesitate to contact the tax professionals at Kershaw, Vititoe & Jedinak PLC.