For the people winning these drawings, it's worth knowing that the IRS generally taxes prizes as ordinary income. While cash winners generally have 24% withheld from the money for federal taxes — whether the prize is $5,000 or $1 million — they may owe more at tax time. And for individuals who win noncash, you're still expected to pony up.
Additionally, you also should receive a tax form from your jurisdiction early next year that shows your taxable prize. Remember, those forms also go to the IRS.Ulrik BoesenEven if you don't receive a tax form showing the income, you are expected to report it, whether you won a cash or noncash prize.
For illustration purposes only: The 24% federal tax withholding on a $1 million prize is $240,000. However, unless the winner were able to reduce their taxable income — such as by making large charitable contributions — the top rate of 37% would apply to the portion of their income above $523,600 for single tax filers . In this example — again, not accounting for any deductions — this would mean owing another 13%, or $130,000.
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