From ScienceWriters: Tax rules for prizes and awards

By Julian Block

The IRS is unyielding when NASW members receive Science in Society Journalism Awards or other awards of money or property in recognition of their journalistic or literary achievements. Writers owe income taxes on their awards.

Some award winners qualify for tax relief. Internal Revenue Code Section 74 authorizes a tightly restricted exception for “prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement.” To qualify for the exclusion — meaning winners sidestep taxes — they must satisfy three requirements.

First, they were “selected without any action on their part to enter the contest or proceeding.” Translation: No exclusion for winners of Science in Society Journalism Awards.

Second, they “are not required to render substantial future services as a condition to receiving the prize or award.” Verboten services include teaching and writing.

Third, they must assign awards away from themselves to a charity. Specifically, winners must “designate” — that is, instruct the award-conferring organization to turn the proceeds over to one or more governmental agencies (at federal, state, or local levels) or to certain charities, such as schools or churches.

The Nobel Prizes are the best-known example of big-bucks awards that sidestep taxes when they are assigned away. Code Section 74 was no obstacle for President Obama when he won the Nobel Prize in 2009. Mr. Obama immediately announced that he would donate the full 10 million Swedish kronor (about $1.4 million) to charities. So he owed no taxes on the award.

Self-employment taxes. Suppose that, unlike Mr. Obama, you decide to skip the exclusion and report the award. You are liable for income taxes, but not for selfemployment taxes, because you are not in the business of winning awards. Report your award on Line 21 (“other income”) on the front of Form 1040, not on Form 1040’s Schedule C. As the source of the income, specify “award” in the box to the left of where you enter the amount.

On a personal note, I appeared on “The Match Game,” hosted by Gene Rayburn, and was teamed with John Forsythe, best known to television audiences as the conniving patriarch on “Dynasty.” I won about $100 for my 1966 appearance, as did my wife who appeared on a later show and was teamed with Bennett Cerf, renowned as a panelist on “What’s My Line?” and as a publisher. As there are no exclusions from income taxes for game show winnings, my wife and I made the required entries on Line 21, because we are not in the business of appearing on shows.

The following year, I was a “Jeopardy!” contestant for four games. Back then, the money amounted to much less. The host was Art Fleming. A check for $1,910 and a set of Compton’s Picture Encyclopedia arrived about a week after the birth of our first child; we photographed him “holding” the check. I made sure to enter $1,910 on Line 21 and was never dunned by the IRS for self-employment taxes.

My “Jeopardy!” winnings of $1,910 were chopped liver, compared to the $2,520,700 earned in 2004 by Ken Jennings. He was victorious on 74 episodes of the show, its longest winning streak. Did that many wins compel Jennings to complete Schedule C, thereby obligating him to pay an enormous amount of self-employment taxes? Not if he had asked me. I would have told him to stick with Line 21 and not to fret about his streak being surpassed by Cal Ripken.

Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as “a leading tax professional” (New York Times), “an accomplished writer on taxes” (Wall Street Journal) and “an authority on tax planning” (Financial Planning Magazine). For information about his books, visit julianblocktaxexpert.com.

August 22, 2013

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