Cruise ship on the water © iStock

Dear Tax Talk,
My wife and I work for a public school district. The Education Foundation (a nonprofit organization) had an employee contribution campaign in 2014. All who signed up for either a single or monthly payroll deduction of any amount were entered in a drawing for various prizes, including the grand prize of two cruise line gift cards totaling $1,500. Amazingly, we won the free cruise!

I’ve read about the requirement that the prize must be $600 minimum and the payout must be at least 300 times the cost to participate, but this is kind of different. We each elected to give $10 per paycheck ($20 total per monthly pay period), but there was no set amount required, as is the case with a raffle ticket.

I just don’t know whether we have to report this as “other income.” Thank you.
— David

Dear David,
Yes, you will need to report the $1,500 cruise gift cards as other income, as they are considered to be a prize and the IRS considers this to be a taxable event.

In essence, you did not actually purchase any “raffle tickets,” but by participating in the campaign, you and your wife received the right to participate in the prize drawings. You should have received from the Education Foundation a Form 1099 that reported the amount of your winnings; however, if you have not received it, do not let that deter you from reporting your prize. The IRS requires taxpayers to report not only prizes, awards and other contest winnings, but also other kinds of miscellaneous income, such as cash earned from side jobs, goods or services received as a result of bartering, and gambling proceeds.

In addition to enjoying your fabulous free cruise, there is some more good news for you. Keep in mind that generally you are entitled to deduct the amounts that were taken out of your paychecks for the Education Foundation employee contribution campaign as an itemized deduction on Schedule A as a charitable contribution, as long as the foundation is recognized by the IRS as a qualifying organization for charitable purposes.

Thanks for the great question and bon voyage!

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