Houston Man Learns Nothing is Free. Prize of “Free” Donuts is Taxable
Here's something anyone who wins a prize worth more than $600 dollars needs to know. The Internal Revenue Service says it's taxable income, and you have to pay taxes on the value of the prize.
A Houston man who won coupons that got him free donuts for a year has learned they weren't really "free." The IRS says he has to pay taxes on the coupons.
Bob Choate won a year's supply of coupons from Shipley's DoNuts on Houston Astros Fan Appreciation Day at Minute Maid Park.
There were 365 coupons, each one worth one donut, a dozen donut holes and one cup of coffee. Choate thought they were free, until he got a letter from the IRS telling him he owed taxes on the estimated $927 he would pay for them if he didn't have the coupons.
The IRS tax code says prizes and awards are subject to taxation "at their fair market value." If prizes are valued at more than $600, the person or group giving the prize are required to issue a Form 1099 stating the value of the gift or prize.
The form goes to the person who wins the prize, and to the IRS, which means the IRS knows you won the prize. The IRS computer will flag your tax return if it doesn't include the 1099 and the amount shown on it.
Whether you win a bass boat at a fishing tournament, or a home theater TV at a grand opening drawing, you have come into possession of something that's worth money, and the IRS treats it as taxable income. So don't act surprised when you get that friendly reminder letter from the IRS.
The only way to get out of paying taxes on expensive prizes is to not accept the prize, or, donate the prize to a tax exempt charity and claim the value as a tax deduction.