Tax time is upon us. It's that moment when the thrill you felt at winning is overtaken by that twinge of nervousness at the thought of paying taxes on your prizes. But this is only if you're unprepared. With some simple planning, you'll breeze through the process. Here are some facts about reporting income from IRS tax form 1099-MISC to help ease any stress you have over this. Please remember though that I'm not an accountant. These tips are meant to point you in the right direction. If you're unsure about something, it's best to contact your tax professional or the IRS.
When you win a prize, either cash or material good, you have to report the FMV (Fair Market Value) as income. Sweepstakes sponsors are required to send you form 1099-MISC which lists the ARV (Approximate Retail Value) if the prize totals $600 or more. You still have to report totals from smaller wins but sponsors may not send you forms, so be sure to keep your own records.
See my article regarding differences in ARV and FMV linked below. But for now, let's assume that the FMR and ARV aren't wildly different, so you're ready to fill out your tax forms. This part isn't that complicated. Fill in the total value of prizes on the 'other income' line on your 1040 form and follow the 1040 instructions as usual.
A wide discrepancy between the FMV and ARV is what could make the process more complex. You don't want to pay taxes on a higher prize amount than is necessary. If you've calculated the FMV to be much lower than the reported ARV and you can't resolve the issue with the sponsor, then contact the IRS regarding the incorrect info on the 1099-MISC. They will contact the sponsor to attempt to obtain the correct amount.
Make sure you have proof of how you arrived at the FMV total (sales flyers, etc.). The IRS may send you form 4852—Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.—so you will be able to file your tax return on time if the sponsor is late in responding.
For more information including downloadable instructions for forms call (800) 829-1040 or visit the 1099-MISC info page at the IRS website and Approximate Retail and Fair Market Values.