My sister had a book in 1982(could have been old then) about a witch
that lived in an attic of a house
that a mother and a son lived in. The mother and son bake a cake for
the fair or town carnival. Then there was something about a neighbor who 
always won the contest. Anyway at the carnival or fair, the witch
steals the cake of the neighbor by putting it in her hat. The little
boy and mother win.

I am trying to find the title to this book. Can anyone help?

I believe your book is "Old Witch and the Polka-Dot Ribbon," by Wende
and Harry Devlin. I used to read this book aloud to my young
goddaughter in the 1970s. The ribbon mentioned in the book's title is
a special polka-dot prize ribbon that the town's fund-raising carnival
gives to the witch for "Most Original Cake." The recipe for the
witch's "magic nut cake" is included on the back of the book, and it
is a very tasty cake indeed (naturally, I had to bake it for the
little girl to whom I read the book).

This book is a sequel to the equally delightful "Old Black Witch," in
which we learn how Nicky and his mother first meet the 300-year-old
witch, who resides in the attic of the old house that they move into.
The witch is a good cook: the first book has a blueberry pancake
recipe on the back!

"When the kitchen is finally empty, Old Witch makes her own magic nut
cake to enter in the carnival's cake baking contest."

Amazon: Old Witch and the Polka-Dot Ribbon
http://www.amazon.com/witch-polka-dot-ribbon-Wende-Devlin/dp/0819304182

If you'd like to purchase a used copy of "Old Witch and the Polka-Dot
Ribbon," here are some options:

ABEbooks Search Results
http://www.abebooks.com/servlet/SearchResults?sts=t&an=devlin&y=10&tn=old+witch+and+the+polka+dot+ribbon&x=44

AddALL Rare, Used, and Out of Print Book Search
http://used.addall.com/SuperRare/RefineRare.fcgi?id=061129205018136239 

There's also a current eBay offering:

eBay: Old Witch and the Polka Dot Ribbon
http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=140050433705&ssPageName=MERCOSI_VI_ROSI_PR4_PCN_BIX&refitem=190044707622&itemcount=4&refwidgetloc=closed_view_item&refwidgettype=osi_widget

I hope this is the right book! If it is not, or if anything is unclear
or incomplete, please request clarification; I'll be glad to offer
further assistance before you rate my answer.

Best regards,
pinkfreud

I think that's it. Thank you so much!