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Originally Posted by JeffMorse
So I guess we'll have to pay about half of it to Federal tax, 9% or so to State, then pay tax on a 50k car. That hurts a bit. Is my math off?
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Not sure where 50% to feds comes from. My understanding is that it would be calculated as normal income on your tax returns. My "Effective Tax Rate" is usually between 11 and 15%, this would bump it up but I'm fine with that.
So...the prize is $40K cash...do you pay sales tax on cash prizes...nope, now if you go and buy a car with that $40K, yes you will pay the sales tax on the car, or it could be a boat, or house, you pay sales tax on it regardless of where the money came from.
OR prize option of $50K towards a new car at Rodgers Chevy...it's still cash in that sense because it's a voucher...to me they are bumping it up $10K if you buy the car...in essence free sales tax money (almost cuz you pay income tax on the extra $10K).
So, if you are in the market for a Chevy Camaro, then the $50K towards a car is the clear choice. If you are not in the market, then take the cash, pay normal income taxes on it and invest it in a Mutual Fund or whatever and earn 5, 10, 20% on it (you will have to pay capital gains taxes though...LOL).
My .02 cents.
HR Block says
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Prize money is taxed as ordinary income.
Generally, the federal government taxes prizes, awards, raffle and lottery winnings, and other similar types of income as ordinary income, no matter the amount. This is true even if you did not make any effort to enter in to the running for the prize. Your state will tax the winnings too, unless you live in a state that does not impose a state-level income tax.
The tax rate will be determined by your income. So, for instance, if you make $42,000 annually and file as single, your federal tax rate is 25%. If you win $1,000, your total income is $43,000, and your tax rate is still 25%. It’s conceivable that a large prize could bump your income into a higher tax bracket. See all tax brackets for 2015 explained here.
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BTW, we have a progressive tax system, that means if you are bumped up to the next tax bracket by $1 to say the $28% tax bracket (married = $151,901) so lets say the $50K prize makes your income $151,901, it's only that first $1 that is taxed at 28%, your dollars in the 25% bracket are still taxed at $25%, your dollars in the 15% still taxed at 15% and so on.
Just sayin...I've heard people say "i'm not taking that raise cuz it bumps me up to the next bracket"...not taking a raise (or prize money) due to taxes will NEVER EVER EVER make any sense.