Congratulations — you won a cash giveaway! It’s always nice to have extra money in your bank account, no matter how small the prize is. But there are tax implications and legalese that comes with winning a mountain (or molehill) of cash. Here’s what you need to know about winning a cash giveaway.
First, pay up
The worst part about winning cash? The tax bill. Prize money is taxed as regular income. The tax rate is determined by the amount you win and your current income.
“The first thing you need to know about winning anything is that there are taxes involved,” said Lisa Greene-Lewis, certified public accountant and tax expert for TurboTax.
How does this work? For example, if your annual income is $75,000 and you file as single, your highest federal tax rate is 22%. If you win $5,000, your total annual income is $80,000 and will still be taxed at the same rate because your income is still within the same tax bracket. Note that there are some situations where your cash winnings may bump you up to a higher tax bracket. (Here’s a breakdown of the 2020 tax brackets).
If the prize is $600 or more, the donor must report it to the IRS, said Greene-Lewis. If the cash giveaway is under $600, you’ll still need to claim the cash giveaway on your tax return, using form 1099-MISC for the year the prize was awarded.
“You should still report it no matter what,” said Greene-Lewis. “But you’re also eligible for quite a few deductions. The tax burden may not be as large as you think.”
There may also be state and local taxes, depending on where you live. Before you receive the money, look for a tax attorney or accountant to help go through your expected winnings. Unless the donor announces you as the winner, consider staying silent about your windfall. Winning a cash giveaway makes you an easy target for scams.
Make a plan
So how should you spend your newfound winnings? Consider investing some portion of it in your financial future.
- Contribute more to retirement. Setting aside some money in an individual retirement account ensures you’ll have a nest egg in the future. Learn more about setting up an IRA here.
- Pay off any debt. Even if you didn’t win enough to cover all your debt, paying off a chunk of any outstanding payments can put you on the path to financial freedom.
- Shore up your emergency fund. An emergency savings account is an important part of any financial safety net. A good rule of thumb is having between three to six months of expenses stored away. Here are five things to look for in an emergency savings account.
When you win a cash giveaway, it’s a good chance to sit back and enjoy your luck. But make sure you’re living within your means. A budget can help you stay on track — we have a downloadable budget sheet here.
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