Taxes on reward money

[LBJay]

They just gave the guy who found the academy awards his 50 grand reward. I thought for sure they would figure out a way to stiff him. He thinks he’s going to buy a house in Mississippi with it. But is he going to get a full tax hit on it?

[Andy]

I’ve no idea as to the OP, but would you get tax relief, or a rebate or however the system works in the USA, on a ransom payment you had to make?

[kinoons]

I’d be willing to bet that the government takes 45% out of it, similar to what they take from a bonus check or other bonus you recieve at work.

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Kinooning it up for 20 years and counting

[Billdo]

Under the Section 61 of the U.S. Tax Code:

Sec. 61. Gross income defined
(a) General definition

  Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

    (1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

    (2) Gross income derived from business;

    (3) Gains derived from dealings in property;

    (4) Interest;

    (5) Rents;

    (6) Royalties;

    (7) Dividends;

    (8) Alimony and separate maintenance payments;

    (9) Annuities;

    (10) Income from life insurance and endowment contracts;

    (11) Pensions;

    (12) Income from discharge of indebtedness;

    (13) Distributive share of partnership gross income;

    (14) Income in respect of a decedent; and

    (15) Income from an interest in an estate or trust.

There are other sections that have other specific inclusions and exclusions, but the general rule is “gross income means all income from whatever source derived.”

There is also Section 74, which provides that:

Sec. 74. Prizes and awards

(a) General rule

  Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.

I would say that between the general rule of sec. 61 and the more specific rule of sec. 74, it would be part of gross income to the reciepient.

[Danielinthewolvesden]

Bildo is absolutely right (although perhaps abit long winded). He will pay fed & prob state tax. Likely there will be a 20% witholding. But, they will not take out employment taxes (fica=social security), and he won’t owe them, so he will pay at most 28%, plus the CA bite.

[C_K_Dexter_Haven]

Daniel, the 28% rate pretty much assumes that he has no other income. The top marginal rate for U.S. Federal tax is 39.6%, so he could be paying substantially more than 28%.

[Ike_Witt]

Originally posted by CKDextHavn:
**Daniel, the 28% rate pretty much assumes that he has no other income. The top marginal rate for U.S. Federal tax is 39.6%, so he could be paying substantially more than 28%. **

Yes, but the guy found the statues wilst dumpster diving. I’ll go out on a limb and say he won’t be paying 39.6% tax.

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Sometimes you feel like a coconut, sometime you feel like a yak.

[Keeves]

What about reward which are give for anonymous tips? Technically, I suppose one should voluntarily declare it and pay the tax, even though the govt has no way to find out about it. Wouldn’t it be better if there were an official exemption for “income received from a government body in return for information in a criminal investigation”, or something like that? To be fair, it should expempt whether it was anonymous or not, and yes, this would also include funds doled out by local cops to their friendly stoolies. Granted they probably don’t pay full tax anyway, but that’s beside the point.

[Billdo]

Those are all gross income for tax purpose, as is income from illegal sources.

So, all you blackmailers, drug dealers, etc., out there, if you want avoid prosecution for tax evasion (a la Al Capone) report and pay taxes on all of your illegal income.

Just another tax tip from Billdo, C.P.A.