How Are Gambling Winnings Taxed?
According to a 2016 Gallop report, almost two-thirds of Americans are doing gambling activities.
The government through the Internal Revenue Service (IRS) has developed rules in regard to the business of gambling. According to IRS, both cash and non-cash gambling winnings are considered taxable income.
Therefore, before you embark on gambling, you need to understand the gambling tax law in order to avoid colliding with the IRS. You also need to know how to report your winnings and how you can turn your gambling losses to your advantage. In this article, we will focus on the important things that you need to familiarize yourself with in regard to how gambling winnings are taxed.
A Professional Gambler
A professional gambler is one who engages in gambling in order to earn a living. Therefore, professional gamblers need to report their gambling income as well as their gambling expenses on Schedule C and not on Schedule A. The gambling income of a professional gambler is taxed at the normal effective income tax rate.
Reporting Gambling Winnings
You must report all your winnings on your tax return. This is important because your total income constitutes job income, gambling income and any other income. During the interview of your file return, you are going to be asked for more information about your gambling income and losses for the year.
You are also obligated to report small winnings and prize money or awards that you won through the year. Any non-cash winnings such as cars and trips received from the casino, raffles or lotteries should be reported as other income. These non-cash gambling winnings are taxed depending on their fair market value.
Fortunately, gambling taxes are not progressive like income taxes. Whether you win $500,000 at the poker table or $1,300 at the slot machine, the tax rate (25%) remains the same. In most cases, the casino deducts 25% of the full amount you won before paying you. However, if you do not provide the payer with your tax ID number, federal taxes are withheld at a rate of 28%. Withholding is done when the winnings, excluding the bet, are more than $5,000 or a minimum of 300 times the bet amount.
The casino will then provide you with an IRS form known as W-2G in order to report your gambling winnings to the government. The gambling winnings are reported to the IRS based on the type of game. For instance, form W-2G is not required for gambling winnings from table games such as roulette, blackjack, baccarat, and craps. While you will not fill out the W2-G form for these games, your winnings still need to be reported to the IRS rather than the casino doing it when you claim your winnings.
When you win a bingo or a slot machine jackpot, you must report any winnings above $1200. Winnings above $1500 from keno games should be reported. For poker tournament, you are required to report winnings that exceed $5000 while winnings that are above $600 or 300 times your wager should be reported for horse track.
Sharing Gambling Winnings
When two or more players share the gambling prize, they are required to fill out form 5754 [pdf]. When the casino has deducted the tax rate, it will divide the amount of the gambling winnings among the winners and then report the gambling winnings on form W-2G under the players’ names.
Reporting Gambling Losses
Just like gambling winnings, you also need to report gambling losses for tax purposes. When you are honest about the money you lost during gambling, you may end up saving money since IRS will allow you to deduct gambling losses. You are required to deduct gambling losses when you itemize your gambling deductions on Form 1040, Schedule A [pdf] and when you have documentation of your winnings and losses. It is wise to report the winnings and losses separately instead of presenting a net amount.
The gambling losses are deducted as miscellaneous deductions on Schedule A and not subjected to the 2% limit. While it may be impossible to deduct all your losses, you can deduct the gambling losses up to your gambling winning amount. For instance, if your total gambling winnings in 2018 were $6000 and your gambling losses were $6800, you are only required to deduct $6000 of the losses.
It is also important to note that you may not get the maximum tax benefit when your total itemized deductions don’t go beyond the standard deductions. The total itemized deductions include home mortgage interest, charitable donations and medical expenses
Believe it or not, even winnings from illegal gambling are still taxable. The American Gaming Association found out that most Americans spend over $150billion per year to engage in illegal sports betting. While sports betting is illegal in certain states, it is legal in Montana, Delaware, Oregon and Nevada. Therefore, the winnings that you get from illegal sports betting are taxable.
You are required by the IRS to keep a detailed record of your gambling winnings and losses, Form W-2G and Form 5754. You are also required to keep any gambling related documents like receipts, payment slips, wagering tickets, credit records, bank withdrawals, substitute checks, canceled checks and statements provided by gambling establishments. These documents are crucial as they will help prove your winnings and losses during deduction of losses.
IRS suggests that you keep the following information for each win or loss:
- Type of gambling activity
- Amount of winnings and losses
- Name, address and location of establishment or event
- Names of people present during the gambling activity
For specific gambling transactions, you can provide the following information as proof of your winnings and losses:
- For slot machines, provide a record of the date of winning, machine number and the time of playing.
- For table games, provide the number of the table you played and the establishment’s credit card data showing whether the credit was issued at the cashier’s cage or in the pit.
- For Keno, provide copies of casino credit data and check cashing records. You should also provide copies of keno tickets that you bought at the day of playing that were authorized by the gambling establishment.
- For racing events, provide records of the races, amount collected on winning tickets, amount lost from losing tickets, amount of wagers, payment records and unredeemed tickets.
- For Bingo, provide the amount of tickets bought, the number of games played, the amount collected on winning tickets, and any receipts from the casino.
- For lotteries, provide a record of dates, winnings, losses, tickets purchased, payment slips, unredeemed tickets and winning statements.
As seen above, every dollar that you make from any gambling activity, whether legal or illegal, is a taxable income. That said, you need to make sure that you keep track of your winnings and losses and record the necessary details each time you gamble. The documentation of your gambling activity and a diary of your winnings and losses will come in handy if you wish to deduct your gambling losses for the year. These records will also help maximize your tax refund if IRS owes you. For the best casino games, be sure to visit www.casinosecret.com/de where they offer 50% Casino Cashback on your initial deposit.