Perhaps you just played in a major chess tournament and won a substantial chess prize. Maybe you just won a nice clock or trophy from playing in a smaller event at chess club. You might even just be curious. Whatever box you belong to, you are probably wondering the same thing as everyone else who is reading this article: Are prizes taxable, and if so, what rules apply to them?
In the United States, you are subject to income tax on all of your income, from whatever source derived, unless such income is exempt by law. As there is no exemption, prizes and awards are fully taxable. If you receive a noncash prize, such as a chess clock or trophy, you are liable for tax on the fair market value thereof at the time the prize was received, no matter how small the value.
Most scholastic players probably will not have to pay tax on prizes due to the standard deduction. However, while most single taxpayers have a standard deduction of $12,950 (for 2022), dependents cannot claim a standard deduction above the greater of (1) $1,100; or; (2) their earned income plus $350. As most scholastic players will be deemed dependents and prizes are considered unearned income, they will pay income taxes on any prizes they receive in excess of $1,100 during a tax year (i.e., not any one prize, but all prize winnings for an entire year). If they have earned income of at least $750, any prizes over $350 for a tax year will trigger income taxes, likely at the lowest marginal rate of 10%. Although usually one does not need to file a tax return if their adjusted gross income is below $12,950, any dependent having to pay taxes due to the standard deduction limits will be required to file a tax return.
If you are required to file, prizes and awards are reported on line 8h of Schedule 1, which is transferred to Form 1040 with the rest of the other income (if any) via line 8 of that form. Anyone who pays you prizes of at least $600 during any tax year will be required to send you and the IRS a Form 1099-MISC reporting the prizes paid. This form should be mailed to you by the January 31 following the year you received the prizes. In order to issue this form, the payor will need your taxpayer identification number (i.e., your Social Security number if a U.S. citizen). If you fail to provide this number, the payor may be legally obligated to withhold 24% of the prize as backup withholding and remit this amount to the Treasury, which you can only retrieve later by filling a tax return and claiming a refund.
Finally, please remember that if you live in a state that levies income tax, it is very possible that you might have to pay state income tax on your prizes as well. State income taxes have their own standard deductions (often much lower than the federal standard deduction) and can be as high as 12.3%, depending on your state and income. In the unlikely event that you are not taking the standard deduction, state taxes are deductible against federal income taxes up to a limit of $10,000.
You now know that prizes are indeed taxable like most other forms of income at ordinary rates. Hopefully, because you now understand the tax consequences of receiving prizes, you have been empowered to plan accordingly.
Bibliography: Internal Revenue Service, Publication 501, https://www.irs.gov/forms-pubs/about-publication-501 and Schedule 1, https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
Photo Credit: U.S. Embassy in Ukraine, https://ua.usembassy.gov/united-states-widen-sanctions-russia/united-states-treasury-department/
Disclaimer: Nothing in this article shall be construed as legal, financial or tax advice. Rather, this article is intended for educational and informational purposes only.