Friday, August 17, 2012

Taxation & "Free" Rewards: Will Uncle Sam Take a Cut?

In the United States, any income that a person makes is taxable. The problem comes when the average person does not understand the definition of the word "income." Income is money that you earn through your job, your investments and anything else that increases your net worth. 

If you go to work and collect a paycheck, then you are taxed on that income. After your taxes have been withheld, you can use your income to purchase anything you want. If you are using coupons for travel expenses, then you can save money and help your income to last longer.

When you win a prize, whether it is cash or not, that is considered to be income that improves your net worth. If you are trying to find the best entertainment by entering sweepstakes for vacations and you win a trip to Bermuda, then that is considered income that you have to claim.

(Image via Flickr by afagen)

Claiming Income On Your Taxes

Anytime you receive income, in any form, you must claim it on your state and federal income taxes. Whether you win $5 on a scratch-off lottery ticket or a $30,000 car, that is income that must be claimed. When you claim this income, you can deduct the cost of the lottery or raffle ticket you bought to get a final value. If you bought a $5 lottery ticket and won a $10,000 vacation, then you would need to claim $9,995 on your taxes as income.

Why Does The Government Levy A Tax?

The state and federal government collect taxes so that they can continue to operate and offer valuable services. The perception is that our tax dollars go to the IRS to fund secret government projects. The truth is more significant, but not nearly as exciting.

Where Do Our Taxes Go?

National Defense

The federal government spends approximately 20 percent of our tax money on national defense. This includes the operation of military bases at home and overseas, paying our military personnel, investing in equipment and offering financial aid to foreign countries.

Social Security

The debates about the viability of the Social Security system and whether or not it can be sustained for the long term continue to rage on. As with national defense, the federal government invests approximately 20 percent of tax revenue into social security. This funds retirement income for seniors, disability income for those unable to work and financial assistance to families in need.

Public Medical Programs

The federal government uses 21 percent of our tax dollars to fund health care programs such as Medicaid and Medicare. These programs allow low income families, people without health insurance and the elderly to get the medical care that they need. It also helps to offset some of the ongoing costs for people who are disabled and are unable to care for themselves.

Supplemental Programs

The federal government takes 13 percent of our tax dollars and funds what it refers to as supplemental programs that fall into a variety of categories. Some of these programs include school lunches, earned income tax credit refund for low income families and child care programs. 


The federal government is constantly investing in new roads, bridges, energy sources and other infrastructure projects. In some cases, the federal government will give public works money to the states to use as the states see fit. In other cases, the federal government will directly get involved with public works projects.

National Debt

The remaining tax money is spread around to various government projects and used to pay as much of the interest on the national debt as possible.

When you win a cash or noncash prize in the United States, you are going to be asked to pay income tax on it. Without that income tax, the federal and state governments would not be able to offer public services.