How Winnings Are Taxed

• After you win, the entity that awarded you the prize ascribes a value to the vacation's cost. The entity will provide you with a Form 1099 that you'll include as "other income" on your federal tax return, and you'll owe tax based on your income tax bracket. It's possible for costly prizes to kick you into a higher tax bracket, which is capped at 35 percent at the federal level. States that levy personal income taxes also get a piece of the pie, as do some localities. Vacations won from charitable entities are also taxable. You can deduct the cost of the raffle ticket or entry fee from the value of the prize.
  
  

Paying Attention

• The website Bargaineering reports that it's quite common for entities to report more than the vacation is actually worth. While this enhances the entity's image, it hurts your tax bill. For example, if you won a vacation that the entity states is worth $10,000 but is really only worth $5,000, you may have to pay tax on an extra $5,000 you didn't really receive. You can fight your vacation's valuation, so be sure to keep records during the trip. The entity will report the value to the IRS, and if what you report isn't the same, you'll have some explaining to do.
  
  

Another Choice

• One option you may have is accepting cash in lieu of the vacation. The advantage of taking cash is that you know you'll have the money to pay the taxes. In addition, you won't have to worry about keeping records or fighting with the IRS about the value of the prize. You could always try to sell the prize and use the money to pay the taxes, but keep in mind that you may not be able to sell it for what the entity claims it's worth.
  
  

When the Entity Pays

• Some lucky prizewinners find that the entity pays the taxes on their behalf. If this occurs on your vacation prize, you may not owe anything. The entity "grosses up" the value of the vacation, according to the IRS. But Bargaineering warns that many entities are wise to this trick and only pay taxes up to 15 percent. Therefore, you may still owe taxes to federal and state governments.