In gambling, there are winners and there are losers. But, if you don’t pay taxes on your winnings, you’ll end up a loser with the IRS! Whether you’re at a casino or a racetrack, win a lottery, or you’re just enjoying a night of Bingo, your gambling income is most likely taxable income. Whether or not the IRS will receive information about your winnings depends on several factors.
Gambling winnings can come from a variety of sources: casino games, slot machines, poker tournaments, lotteries, sweepstakes, raffles, betting pools, gameshows, horse or dog races, off-track betting, Bingo, and Keno. Winnings can include cash or non-cash prizes. Usually, gambling winnings are subject to a 25% flat-tax based on the cash prize or fair market value of a non-cash prize, such as an all-expenses paid trip or a new car.
When it comes to the big scores, gambling winnings over $5,000 are their own breed. Winnings over $5,000 tend to be subject to your standard income tax withholding. Also, for any gambling winnings of $5,000 or greater, gambling establishments are required to report them to the IRS. Poker tournaments tend to be where the big payouts are in casinos, and the rules regarding the reporting of these winnings changed in 2008. The IRS requires all tournament sponsors or casinos to report winnings of more than $5,000, usually on IRS Form W-2G, Certain Gambling Winnings.
The requirement was put into effect to clear up misunderstandings about tax reporting rules that apply when card players get together in high-stakes tournaments. According to the tax agency, some casinos and the players were confused over whether poker tournament sponsors — who hold the money for the participants — must report tax on the winnings. For poker tournaments completed before March 4, 2008, casinos and other sponsors were not required to report the winnings or withhold tax, although some sponsors did so voluntarily. Now, if tax is withheld from your gambling winnings, you will be sent a Form W-2G from the payer. However, in an office pool, for example with lottery tickets, a Form 5754 is also needed.
Sponsors do not need to withhold federal income tax at the end of a tournament. If a sponsor does not follow the rule, the IRS will enforce it and “require the sponsor to pay any tax that should have been withheld from the winner if the withholding requirement had been asserted.” The withholding rate is normally 25% of amounts that should have been reported. To enable compliance, a winner must provide a taxpayer identification number to the tournament sponsor. This is usually a Social Security Number. If the winner fails to do that, the sponsor must withhold federal income tax at a rate of 28%.
By law, you must report all gambling winnings on your federal income tax returns, regardless of the amount and whether you receive a Form W-2G or other reporting form. However, you may be able to offset winnings with losses. Under the Tax Code, you cannot claim an overall tax loss for gambling activities, but amateur gamblers can claim losses as an itemized deduction, up to the amount of winnings. Professional gamblers report their activities on Schedule C, as they are a self-employed individual.
As you might imagine, it’s important to keep accurate records, and keep in mind that you may have to pay an estimated tax on gambling winnings. One way to stay on top of your winnings and losses is to maintain a diary or ledger that shows the type of gambling activity, the location, and the amounts that you won and lost. You can support those amounts with receipts, tickets, statements or other records that substantiate your claims. It’s important to note that the same basic rules apply to online gambling, and that, despite a common misconception, Internet-based gambling activities aren’t exempt from taxes.
So how do you report your gambling winnings and losses? Easy! They must be reported on your tax return, and that’s where Crippen comes in to help. When you contact us to prepare your tax return, make sure you mention you have gambling winnings and losses. (We hope you have more winnings than losses!) We will prepare the forms you need to report your gambling results, which takes the guesswork out for you. We are a full-service accounting firm that can walk you through not only the tax preparation process, but also ensure you have the right forms, and lessen the potential for errors. For more information, give us a call today.