Dear Tax Talk,
A nonprofit — let’s call it “X” — has a raffle with $125 tickets and a $5,000 first prize. As I understand the taxes, the first prize win is much less than the 300 percent required for X to report it to the IRS. The win minus the ticket is only $4,875, so it is less than the amount X would need to withhold anything for the IRS. So the organization doesn’t have to do anything with the IRS in regard to the winnings.
I volunteer for the organization and am expected to sell at least three tickets. However, I don’t know anyone who could afford to pay $125 for a raffle ticket. So I am going to have to sell parts of the ticket. If I sell 12 people $10 pieces and I pitch in $5, then I have $125 to give X. I would give each of the 12 people a document with the number of the ticket on it and a statement saying that they get 8 percent of the prize if that ticket wins. That way, I could sell $10 chances to 36 people and pitch in $15 of my own to cover my whole obligation to X.
If one of the three tickets wins first prize, then I pay each of the 12 people with that number $400 and I keep $200 for myself.
How do I figure taxes on raffle prize winnings? Do I just put $200 on the line “other income”? Do I just ignore the other people I paid, since their taxes are their business?
You are correct that the exempt organization is not required to report the $5,000 raffle prize winnings. This is because they do not meet the dual requirement of the prize being $600 or more and the payout being at least 300 times the amount of the ticket. If your share of the winnings is $200, then that is the amount you will include on your tax return as “other income.” The other people are responsible for reporting their own winnings.
The IRS considers raffles to be a form of lottery and if the requirements listed above had been met, the organization would have had to complete Form W-2G, Certain Gambling Winnings, to report the earnings. If that had been required and you had a group of individuals that shared in the winnings, then you would have had to complete IRS Form 5754, Statement by Person(s) Receiving Gambling Winnings, which includes the name, address, Social Security number and amount of winnings paid to each person. This is what happens when you hear on the news that a group of employees has won a large amount of lottery money.
One final note: You should keep in mind that you can deduct the cost of the raffle tickets up to the amount of your winnings on line 28 of Schedule A, Itemized Deductions.
Thanks for the great question and good luck on your ticket sales.
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