Under federal tax law, nearly all prizes or awards are subject to taxation. The value of the prize or award is considered income to the taxpayer. Not only are prizes and awards subject to federal taxation, some states also tax them. Recipients of prizes or awards can reduce the amount of taxes they owe by donating that prize or award to charity and then claim a deduction for a charitable donation. Another way recipients can avoid taxation is to transfer their raffle ticket to someone else prior to the final drawing.
There are some instances when a prize or award is exempt from taxation. For example, prizes or awards given for religious, charitable, scientific, educational, artistic, literary, or civic achievement are not taxable if the recipient was selected without any action on his part, is not obligated to provide any future services, and if the prize or award is donated to charity. Another instance when an award will not be taxed is if an employer gives an employee an achievement award. But, the exclusions from income for an employee achievement award is limited to $400. Assume Mary’s employer gives her an achievement award that has a value of $600. In this situation, Mary would have taxable income of $200 ($600 - $400), because federal tax law only excludes the first $400 from income. As for employers who give out prizes or awards, they do not have to pay taxes on them and can deduct from their income the cost of providing the award depending on the amount.