Everyone always asks... "what if I win the lottery?". Winnings from lotteries and raffles are gambling winnings. If you won the lottery in 2010, you must include your winnings in your income. In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses, and other non-cash prizes. 

However, you can deduct gambling losses you had during the year, but only up to the amount of your winnings if you itemize your deductions. 

This life event also addresses the tax implications of winning:

Prizes and Awards

If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income. For example, if you win a $50 prize in a photography contest, you must report this income. 

Prizes or awards in goods or services must be included in your income at their fair market value. For example, if you are a salesperson and receive "prize points" redeemable for merchandise, which are awarded by a distributor to employees of dealers, you must include their fair market value in your income. The "prize points" are taxable in the year you receive them, rather than the year you redeem them for merchandise.

Note: If you refused a prize, do not include its value in your income.

Employee Awards

Amounts you receive for outstanding work, such as bonuses or awards, are included in your gross income and should be shown on your Form W-2. These include prizes such as vacation trips for meeting sales goals. If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. 

However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. 

Gambling Winnings

You must file Form 1040 and include all of your winnings. Gambling income includes, among other things, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips. You can find more information in Publication 525, Taxable and Nontaxable Income.

Anyone who pays your winnings or awards you a prize is required to issue you a Form W-2G if your winnings are subject to Federal income tax withholding or if your winnings are over a certain amount.

However, all gambling winnings must be reported regardless of whether any portion is subject to withholding. In addition, you may be required to pay an estimated tax on your gambling winnings. For information on tax withholding on gambling income, refer to Publication 505, Tax Withholding and Estimated Tax.

If your luck isn’t always so good, you may deduct gambling losses. Losses may be deducted only if you itemize deductions and only if you also have gambling winnings. Claim your gambling losses as a miscellaneous deduction on Form 1040, Schedule A. But remember, the losses you deduct may not be more than the gambling income you report on your return.

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