Gambling Winnings and Deducting Losses

Cleyton Ewerton, Unsplash
@cleytonewerton

In gambling, there are winners and losers. But even the winners can be losers if they don't pay their taxes! Any money you win while gambling or wagering is considered taxable income by the IRS as is the fair market value of any item you win. This means there there is no way to avoid paying taxes on gambling winnings.

Gambling income isn't just card games and casinos; it also includes winnings from racetracks, game shows, lotteries, and possibly even bingo. Certain special rules apply to gambling income and there are strict record keeping requirements required by the IRS.

However, you may be able to deduct gambling losses when you itemize your deductions.
Your gambling winnings or losses is generally reported on Form W-2G or via Form 5754.

The easiest and most accurate way to find out how to report your gambling winnings and losses is to start a free tax return on eFile.com. Based on your answers to several questions, the e-File app will select and prepare the tax forms necessary to report your gambling winnings and losses on your tax return. However, if you want to learn more about how your gambling income affects your taxes, read on.

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Taxable Gambling Income

Gambling income is almost always taxable income which is reported on your tax return as Other Income on Schedule 1 - eFileIT. This includes cash and the fair market value of any item you win. By law, gambling winners must report all of their winnings on their federal income tax returns. Depending on the amount of your winnings, you may receive the Form W-2G which reports the amount of your winnings and the amount of tax that was withheld, if any.

For nonresident aliens, the amounts will be reported on your Form 1040-NR, Nonresident Alien Income Tax Return. Why worry about all of these forms? Simply prepare and e-File with eFile.com including Form 1040-NR and we will gather and generate the proper forms for you based on a few simple questions. From there, the proper gambling forms will be filed along with your Tax Return. Remember that, even if you do not get a Form W-2G, you must report all gambling winnings on your return.

Gambling winnings include, but are not limited to, money or prizes earned from:

Casino games
Slot machines*
Keno*
Poker tournaments
Lotteries
Sweepstakes
Raffles
Betting pools
Gameshows
Horse or dog races
Off-track betting
Bingo.*

*Exception: winnings from keno, bingo, and slot machines may not be subject to tax withholding if certain circumstances are met. That is, the payer of said winnings may need to be provided with a social security number to avoid withholding.

If you win the lottery, congrats! This income is still taxable, so you will owe taxes on Mega Millions, Powerball, and other lotteries and will take home your winnings after taxes. By default, the IRS will take 24-25% of your winnings and may even withhold some for state taxes if applicable. Because gambling winnings are included in taxable income, the tax brackets or rates for your filing status will be applied to your total income, which means you will pay up tp 37% taxes on a portion of your winnings.

To reduce the taxes you pay on lottery winnings, consider opting for annuity payments; this results in installments over several years which can reduce taxes paid since you will be in a lower tax bracket over these years rather than paying it all at once in a high tax bracket. You can also donate some of the money to charity and deduct it or invest it in a trust which reduces your immediate taxes. The decision is situational - seek a financial advisor to assist with your personal situation.

When Do I Get a W-2G?

If you win enough to receive Form W-2G, this should be sent to you by January 31 following the year in which you won the income. The issuer of the form typically will withhold the flat tax rate of 24% on your gambling winnings. Generally, the payer needs to provide you with the W-2G form if you win:

$1,200 or more from bingo or slot machine
$1,500 or more from keno
$5,000 or more from poker
$600 or more or at least 300 times the amount of the wager
Any amount of winnings subject to federal income tax withholding.

Even if you do not receive Form W-2G, the income needs to be reported on your tax return.

If gambling winnings are received that are not subject to tax withholding, you may have to pay estimated tax. Not sure how much to pay? Use the eFile.com W-4 TAXometer to estimate how much to withhold and avoid any tax penalties.

Your gambling winnings are generally subject to a flat 24% tax. However, for the following sources listed below, gambling winnings over $5,000 will be subject to income tax withholding:

Any sweepstakes, lottery, or wagering pool (this can include payments made to the winner(s) of poker tournaments).
Any other wager (if the proceeds are equal to or greater than 300 times the bet amount).

State taxes vary for gambling winnings; some states also have a flat tax rate for gambling while others may have more complicated rules.

If you win a non-cash prize, such as a car or a trip, you will be responsible for paying taxes on the fair market value of each prize. Depending upon the amount of your winnings and the type of gambling, the establishment or payer may be required to withhold income taxes. In general, 24% of the amount is required to be withheld. In some cases, a backup withholding of 24% is required instead. If tax is withheld from your gambling winnings, you will be sent a W2-G form from the payer.

Do I have to Report Small Winnings and/or Scratch Cards?

Generally, any income from gambling is taxable income - if you purchase a scratch card for $5 and win $20, the $15 should be reported on your taxes as income.

Gambling Losses

You may deduct gambling losses if you itemize your deductions. You can deduct your losses only up to the amount of your total gambling winnings. You must generally report your winnings and losses separately, rather than reporting a net amount.

Gambling losses are deducted on Schedule A as a miscellaneous deduction and are not subject to a 2% limit. This means that you can deduct all losses up to the amount of your winnings, not just the amount over 2% of your adjusted gross income. When you prepare and e-file your return on eFile.com, the eFile app will automatically generate your eFileIT Schedule A and add it to your return based on the deduction information you enter.

Gambling Records

The IRS requires you to keep detailed records of your gambling winnings and losses as well as any related documents, including receipts, tickets, payment slips, statements, and Form W-2G. You must be able to prove both your winnings and losses if you wish to deduct your losses. The IRS suggests that you keep a gambling log.

The IRS requires you to keep the following information about each gambling win and loss:

Date(s)
Type of gambling activity
Name and address of the establishment or event
Names of other people there at the time of the activity
Amounts of winnings and losses.

If you e-File your tax return, you do not have to send any W-2Gs or other documents to the IRS (but you must keep them for your records in case of an IRS audit).

Professional Gambling

The rules described on this page are for the majority of people with gambling income - those who are not professional gamblers. If gambling is your actual profession, then your gambling income is generally considered regular earned income and is taxed at your normal effective income tax rate. As a self-employed individual, you will need to report your income and expenses on eFileIT Schedule C which the eFile App will automatically generate and add to your Tax Return based on the information you enter. You can deduct gambling losses as job expenses using Schedule C, not Schedule A. Again, the eFile.com tax app will generate all these forms for you.

Gambling Income Tax Requirements for Nonresidents

U.S. Nonresidents can usually report income that is "effectively connected" with a U.S. business on Form 1040-NR. Gambling winnings, however, are considered to be "not effectively connected" and must generally be reported on Form 1040NR. Such income is generally taxed at a flat rate of 30%. Nonresident aliens often cannot deduct gambling losses. However, there is a tax treaty between the United States and Canada that generally allows Canadian citizens to deduct their gambling losses, up to the amount of their gambling winnings. Prepare and efile your Form 1040-NR return on eFile.com.

Reporting Gambling Winnings and Losses

If you have gambling winnings or losses, they must be reported on your tax return. When you prepare and e-File your return on eFile.com, you will report your gambling income or losses during the tax interview which will lead to a request for more information. We will prepare all the forms needed to report this on your return so you don't have to worry about which form you need. eFile.com walks you through the tax preparation process, helps you fill out the right forms, checks for errors, and we provide you your own, secure, Personal Support Page if you have further questions or need help.

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