Taxes On Contest, Raffle, Sweepstakes, Prize Winnings

Contest, Raffle, Sweepstakes Winners: Reclaim Your Prize Tax From The IRS

When Are Prize Winnings From Raffles, Sweepstakes And Contests Taxed?

The IRS has unusually complicated rules for the taxation of prize, contest, raffle and sweepstakes wins for non-resident gamblers in the United States. The IRS taxes prize winnings when both of the following criteria are fulfilled:

    * The prize winnings (or equivalent cash value) are at least $600 USD above the original wager; and

    * The prize winnings are at least 300 times the cost of the original wager.

For instance, if you purchased a raffle ticket for $2 USD in the United States and have prize winnings of $600 USD, you will not have any raffle tax assessed. The value of the initial wager ($2 USD) is subtracted from the value of the raffle win ($600 USD), resulting in a net of $598 USD (slightly less than the minimum threshold of $600 USD for taxes on prizes).

Similarly, if you purchased a raffle ticket for $300 USD and have won a prize of $750 USD, you will also not have any prize tax assessed because the value of your raffle win is less than the 300:1 minimum ratio for raffle tax.

Having described two scenarios where you have escaped taxes on prizes, let us go through a scenario where you will be assessed raffle tax on your prize winnings. If you bought a raffle ticket for $100 USD and subsequently win a car, with an equivalent cash value of $35,000 USD, you will have raffle tax assessed at a rate of 30% of your raffle win. In this scenario, both criteria previously listed are fulfilled. You have won more than $600 USD above the original wager ($100 USD subtracted from $35,000 USD cash value of the car results in a net raffle win of $34,900 USD) and your raffle win is more than 300 times the cost of your original wager (300 multiplied by $100 USD wager is $30,000 USD). In this case, your assessed raffle tax of 30% is $10,470 USD (30% of $34,900 USD).

Sometimes the value of prize winnings is difficult to assess. For example, you may have been awarded air miles points. Depending on the circumstances, the taxes on prizes may be assessed at retail value (e.g., the customer's cost of purchasing an equivalent value of air miles), or it may be assessed at the cost to the provider (e.g., the airline's costs of procuring the air miles). Or if you are lucky, prize tax may not be assessed at all.

To make things even more complicated, some Indian tribal casinos and gambling establishments in the United States may assess the 30% prize tax on all prize winnings (without the need to meet a specified threshold or ratio) for US non-residents. As you can see, it is not always black and white as to whether or not you will be subject to prize tax from the IRS.

How Do I Reclaim Prize Taxes Back From The IRS?

To determine if you are eligible for a gambling tax refund, you must first check your IRS Form 1042-S issued at the time of the prize payout. Box 1 of your Form 1042-S stands for "Income Code", and it is located on the upper left corner of the IRS form. In order to be eligible, Box 1 must read "28". 28 is the income code for gambling. Unfortunately, many contest, raffle, sweepstakes winners are issued 1042-S forms with income codes reading "50". 50 is the income code for "Other Income". Income code 50 is not eligible for any gambling refund.

The tax rate on eligible prizes, contests, raffles and sweepstake wins is 30%. For Canadians, these prize taxes can be partially or wholly reclaimed if you have gambling losses in the same taxation year to claim against your prize winnings. If the US gambling losses are equal to or larger than the same-year prize wins, the entire sum of the gambling taxes will be refunded. Thus, if your prize (minus the original wager) is $2000 USD, you will need same-year US gambling losses of $2000 USD or more. In this case, you were taxed 30% of $2000 USD, or $600 USD. Since you also had a loss of $2000 USD, your taxable gambling income would be reduced to zero, and you will receive a cheque for the full $600 USD of withheld prize taxes.

If your prize (minus the original wager) is $2000 USD and your same-year US gambling losses are only $1000 USD, you will be eligible for a partial tax refund. In this case, you should have only paid $300 USD in taxes [($2000 USD prize winnings subtract $1000 USD gambling losses) X 30% prize tax rate equals $300 USD], instead of $600 USD.  As such, you will receive a partial tax refund of $300 USD.

To substantiate your gambling losses to the IRS, you should always keep a log of your gambling wins and losses while in the US. A record of the time, location, machine, amount of wins/losses can all be accepted as evidence of your gambling activity. Furthermore, old lottery tickets, bingo sheets, airline tickets, hotel receipts (as evidence of your travel to US gambling destinations) can all be used to justify your gambling losses.

If you are from a treaty country and the IRS has deducted gambling tax from your contest, prize, raffle or sweepstakes win in the United States, you are eligible to claim ALL of the deducted taxes. If you are from a non-treaty country, then you will need to deduct your gambling losses from your prize winnings to obtain a partial or full gambling tax refund. Remember, the income code on your IRS Form 1042-S must read "28" in order to claim an IRS tax refund.

How Can US Gambling Refund Help Contest, Raffle And Sweepstakes Winners?

The IRS tax codes are complicated and vague for the layperson to understand. US Gambling Refund has successfully obtained gambling tax refunds for hundreds of Canadians and international clients. If you have been assessed gambling taxes and are ready to pursue an IRS tax refund, click on the link below to reclaim your withheld prize taxes.