The Tax Liability of Winning Raffles

Lucky you. That car, vacation or house is yours after your ticket emerges as the winner. You’re stoked. What’s not to love about raffles? You throw in a few bucks, take a chance and support a worthy charity. Winning a fabulous prize is the fun part; declaring your winnings at tax time adds a little pain to the equation. But if you know what to expect and understand your state’s tax liability laws, you can soften the blow.

The Anatomy of a Raffle

The ticket you purchase is the end result of a journey that begins when event planners seek dramatic prizes guaranteed to pique the interest of people looking for ways to support a charity. Raffle sponsors keep one half of the ticket and the buyer retains the other half; both sport matching serial numbers. Raffle sponsors keep tickets under wraps until the drawing. Depending upon the raffle’s structure, winners may not be required to show up, but organizers often take it upon themselves to supply state-specific tax liability information to the winner on-site. Tax liability is probably the furthest thing from the minds of ticket purchasers, but it shouldn’t be.

Tax Liability Can Hamper Raffles

When a raffle benefiting San Mar Children’s Home was held, the Maryland secretary of state’s office declared, according to a “Washington Post” article, that it was the only successful one in the state. It cited a 90 percent failure rate when real estate is the prize. The problem? “With many housing markets across the country still in decline,” it can be risky to win a prize that comes with an unwanted tax obligation. That’s why some raffle sponsors are coming up with ways to avoid sticking taxpayers with this burden: They raise additional cash to underwrite taxes so consumers can say yes to buying a ticket without being fearful of winning.

Why Tax Liability Issues Are Important

The legalities associated with raffles staged to raise funds on behalf of nonprofits can be daunting. Rules, contracts, prize limits, participant identification, warranty and liability disclaimers abound. Organizations are not shy about asking winners to sign affidavits of eligibility and releases of liability when a grand prize is awarded, so that legal and/or financial problems associated with tax liability don’t come back to bite the nonprofit. Some taxing jurisdictions require raffle permits and set stringent deductibility guidelines around ticket sales and purchases. Charities are generally obligated to report prize income and withholding if the prize amount is $600 or more, using IRS Form W-2G. Why all of this accountability? If the prizewinner fails to pay taxes on winnings, the charity might have to satisfy the tax obligation.

It’s Ordinary Income

“The taxable value of the prize will be treated as ordinary income to the raffle winner for federal and state income tax purposes,” explains the website for the annual National Hockey League’s charity raffle, “and each raffle winner will be required by federal and state law to pay any tax liability incurred in connection with his/her receipt of the prize.” Whether a car, boat or house is at stake, mega-prizes driving raffle ticket sales come with tax liability for their fair market value. Some raffle sponsors are beginning to mitigate these when prizes worth $5,000 or more are on the line, by prepaying an amount equal to 33.33 percent of the fair market value and sending the money directly to the Internal Revenue Service in the name and Social Security number of the winner. However, sponsors are never obligated to defray the entire tax burden.

Check State Laws for Clarification

There’s a Mercedes-Benz in your driveway, thanks to a winning raffle ticket benefiting your favorite charity. With the wheels comes your obligation to pay taxes. Federal tax liability is uniform, but state tax liability laws vary. For example, a raffle isn’t considered gambling in Arizona as long as the charity has been around for at least five years and if no insider or employee benefits if his ticket is the winner. In other states, raffles fall under gambling codes. In Arizona, some raffle winnings might be considered a prize or award exempt from being taxed, but in other states no such law applies. You might be able to afford the top tax attorney in your state if you win, but knowing your tax liability upfront can make your victory even sweeter.