Are Contest Winnings Taxable?

From the Boston Herald’s TaxSmart advice column:

Call it a classic good news/bad news situation.

A Herald reader won a $1,500 gift card from a department store during 2011, but now it’s tax time, and she isn’t sure whether she has to pay income taxes on her prize.

Dear TaxSmart,

I won a $1,500 gift card from a department store, which made me fill out all sorts of tax forms before I collected the prize. However, the store hasn’t sent me a 1099 form or anything like that, so I’m not sure what to do.

Do I have to pay taxes on this money? If so, how much do I owe and where do I list it on my state and federal tax returns?

I’m single, in the 25 percent federal tax bracket, and take the standard deduction.

— Megan, Boston


Dear Megan:

I am afraid the entire $1,500 would be taxable income unless you paid for the gift card in some way.    The tax theory is rather simple in that when you use the gift card to make purchases you receive personal benefits equal to the $1,500 and your starting point for the cost of the card is zero. Perhaps a couple of other similar examples will help you understand it.

  1. If you won the gift card in a raffle then the taxable amount would be the $1,500 less the cost of the raffle ticket(s).
  2. A timeshare company gives you a trip to the Bahamas to listen to their sales pitch.  The value of this trip would be taxable since you did not pay anything for it.

It is the taxpayer’s responsibility to report income whether or not a 1099 has been issued.  This amount should be reported as Other Income on line 21 of Form 1040.

Given the fact that you are in the 25% tax bracket your liability will be federal tax of $375 ($1,500 X 25%) and state tax of $80 ($1,500 X 5.3%).

-Robert S. Fineman, CPA