The sting of owing federal income tax on a raffle prize may take some of the excitement out of your big win. Raffles are considered by the Internal Revenue Service as a type of lottery, and even tax-exempt organizations must report the value of raffle prizes they've awarded under certain circumstances. The prize winnings are reported to the IRS and the raffle-winner on Form W-2G.
Reporting Criteria
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The IRS is only interested in large prizes, so check the value of the item before you take the time to report it. Any prize that is worth $600 or more should be reported, but only if the payout is at least 300 times the cost of the bet. In other words, according to the IRS, if you bought a $1 raffle ticket and won a $600 prize, you must report the winnings and pay taxes on it. Prize winnings are reported to the IRS and the prize winner via the Form W-2G or 1099.
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Raffle Prize Withholding
The organization must withhold 25 percent of winnings greater than $5,000 and report this to the IRS. It's referred to as "regular gambling withholding," and if the organization doesn't report it, the organization itself is liable for the tax. An individual who wins a non-cash prize that's worth more than $5,000 must pay 25 percent to the organization, less whatever she spent on the bet. The organization may opt to pay the taxes as part of the prize, but then it must pay the IRS additional tax on the amount that it pays on behalf of the winner.
Reducing Raffle Taxes
Occasionally, an organization will overestimate the value of the gift that's raffled, forcing the winner to pay more tax than necessary; this might occur if you win an all-expenses-paid trip, for example. To avoid this, be sure to save your receipts. If the organization is unwilling to lower the claimed value of the prize, you can contact the IRS directly and tell the agency that you disagree with the value of the prize you won. You'll need to complete a Form 4598; this form is not available at the IRS site, so you'll need to get it from the IRS directly.
Be Wary of Underreporting
Under-reporting is another danger. Significantly under-reporting a raffle prize could raise a red flag with the IRS and cause your return to be audited. If you are found to owe more tax, you'll owe penalties and interest on top of that. Don't be afraid to deduct the cost of any raffle tickets you've purchased; those are legitimately deductible in the eyes of the IRS.