Since the major economic crisis of 2008 and 2009, many countries have turned their efforts toward gambling as a way of bolstering their economies.
According to The American Gaming Association, the gambling industry here in the United States is worth over 261 billion dollars!
The gambling industry; casinos, state and multi-state lotteries, sportsbooks, racebooks, licensed online casinos, poker sites, and charitable gaming and bingo halls; account for close to 2 million jobs across 40 states and that figure will certainly grow as legalized gambling continues to expand each year.
In this blog post, we’ll cover what you need to know when it comes to gambling winnings and the IRS.
HOW TO KNOW WHAT IS AND ISN’T TAXABLE
It’s important to know that all gambling winnings are taxable, and you must report any gambling winnings income on your tax return.
Gambling winnings are taxable, and the IRS wants their cut.
Gambling income includes but isn’t limited to winnings from casinos, lotteries, sports betting, horse races, and raffles.
It includes cash winnings and the fair market value of prizes, such as cars and trips.
HOW TO KNOW YOUR TAX RATE
There is some good news for gamblers in that while all winnings are taxable, the gambling tax law is unlike the income tax law in that the tax rate you owe on your winnings is a flat 25%.
An exception to this is when gambling winnings exceed $5,000. When that happens, you will be subject to federal income tax withholding.
This included any sweepstakes, wagering pools, lotteries or when the gambling winnings are at least 300 times greater than the betting amount.
Regarding non-cash prizes like vehicles, boats, trips, you are responsible for paying taxes on the fair market value of each prize.
If you win any non-cash prize valued at over $600, you should receive a 1099 Form.
It’s also important to know that dependent on the amount of winnings and the type of gambling; an establishment like a casino or a payer of your winnings may be required to withhold income taxes.
Most times 25% of the amount won is required to be withheld and when this happens, the establishment or payer will send you a W2-G form.
In addition to federal taxes, many states require that you pay taxes on certain gambling winnings.
In this case, it’s best to consult your tax professional so they can advise you on how to proceed.
It’s always best to PLAN first before you spend any of your gambling winnings!
HOW YOU PAY MONEY ON LOTTERY WINNINGS
Regarding any lottery winnings, you are required to report the full amount of your gambling winnings for the year on Form 1040 and you do this on Line 21.
The lottery payer may send you a W2-G Form that shows the amount of your gambling winnings and any tax that has been withheld.
Include the amount from box 1 on Form 1040, line 21 as the purpose of line 21 is for you to report taxable income not reported elsewhere on your income tax return or on other schedules of your return.
HOW MUCH YOU WIN ABSOLUTELY MATTERS
Revisiting that while you’re required to report all gambling winnings, right down to the penny; know that casinos become involved only when gambling winnings reach certain points for income reporting.
- $600 or more at a horse track when winnings are 300 times greater than the betting amount
- $1,200 or more at a slot machine or bingo game
- $1,500 or more in keno winnings
- $5,000 or more in poker tournament winnings
HOW TO REPORT SMALLER GAMBLING WINNINGS
Remembering that you are legally required to claim your winnings at tax-time; you also need to know to report any awards or prizes, or prize money won during that year, regardless of the amount.
Keep this in mind always; gambling income + income earned from work or any non-gambling income = Your Total Income
HOW TO REPORT GAMBLING LOSSES
You can deduct gambling losses by keeping track of your winnings and losses and by itemizing your deductions on Form 1040, Schedule A.
Claim your gambling losses up to the amount of winnings as other itemized deductions.
Two very important points to know
- The amount of losses you deduct cannot be more than the amount of gambling income reported on your tax return
- All expenses in connection with gambling, in addition to gambling losses, are limited to gambling winnings
HOW TO KEEP ACCURATE RECORDS
In order to be able to deduct your gambling losses, you must keep accurate records, provide and produce receipts, tickets, statements along with any other records that will prove the amount of both your winnings and losses.
Finally, the best way to protect yourself and your assets when it comes to gambling winnings is to be “in the know.”
If you have more questions contact us today, by scheduling a free consultation.