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Paying Taxes on Sweepstakes Winnings

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McDonalds Monopoly Game PieceDid you win a sweepstakes or some other raffle? Technically, your winnings are taxable. In theory, it’s no different than the lottery, except the dollar amounts, in most cases, are much smaller. In fact, it’s really not that much different from winning hands of blackjack (taxes on gambling winnings are similar, they are simply reported using a different form), thought chances are your odds at blackjack are probably better than any sweepstakes you’ll enter!

So, how do you pay taxes on sweepstakes winnings?

One of the most widely played sweepstakes is the McDonald’s Monopoly game every fall. You enter by purchasing specially marked food items or requesting playing pieces from McDonald’s and you have a chance to win every single time. If you win a significant prize, expect to receive a 1099-MISC sometime in February of the next year. The 1099-MISC will list the prize value of the item you won.

The next step is to compare actual retail value, listed on the 1099-MISC, against the fair market value of what you won. You owe taxes on the fair market value of the item you received, not the actual retail value listed by the sponsor. You can get the fair market value by looking up how much the item may cost if you were to buy it brand new.

You enter all this information on your Form 1040 on line 21, Other Income. While you will not receive a 1099-MISC unless you win something valued greater than $600, you are legally required to report the winnings as Other Income.

In terms of tax rates, the income is taxed as ordinary income and subject to the same tax brackets as income you derive from your job. There isn’t a higher “sweepstakes tax rate” or anything like that (for large winnings subject to withholding, they may withhold at the highest tax bracket but that may not be your actual tax rate).

So, if you won a free sandwich or fries from McDonald’s, you should be reporting it on your taxes! :)

(Photo: sundazed)

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6 Responses to “Paying Taxes on Sweepstakes Winnings”

  1. Ray says:

    I won a paid vacation last January and should be getting a 1099 MISC sometime next year. The company sponsoring it, in addition also included a cash bonus (probably to off set the tax I would wind up paying). That was a nice gesture I wish more companies would adopt.

  2. Jim,
    Form 1099-MISC is also used for freelancers and independent contractors, correct?

    Makes me wonder how often the form gets used for workers compared to its use for sweepstakes winners.

  3. So if I win a free large fries, I have to pay taxes on that?! haha

  4. govenar says:

    When sweepstakes have prizes like expensive trips, I treat it more as a coupon for 50% off than getting something for free. So if the prize isn’t something that I’d want to pay for anyway, I usually don’t bother to enter the sweepstakes. (But if the prize is just cash, or something like a car that could easily be sold for enough cash such that I come out ahead after taxes, I’ll enter it).

  5. Charles says:

    To clarify, would bartering fall under this as well? Both parties being required to file a 1099 Misc. for Fair Market Value?


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