If you’re lucky enough to be a winner at gambling or the lottery, congratulations! Before you celebrate, understand the tax consequences of your good fortune.
Winning at gambling
Whether you win at the casino, a bingo hall, or office pool, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line on Schedule 1 of your 1040 tax return. To calculate your winnings on a particular wager, use the net gain. For example, if a $30 bet at the race track turns into a $110 win, you’ve won $80, not $110.
Gambling losses are deductible against your winnings, but only as itemized deductions if you are a ‘casual’ gambler. Therefore, if you don’t itemize but instead take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. So you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.
Maintain good records of your losses during the year or risk them being disallowed by the IRS. Keep a diary or logbook that tracks the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips from the casinos.
Winning the lottery
The chances of winning the lottery may be slim but your chances of hearing from the IRS are very high if you don’t follow the tax rules after winning.
Not surprisingly, lottery winnings are taxable. This is the case whether it is a cash prize or noncash prize, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal marginal tax rate may be as high as 37%. You may also be subject to state income tax on your winnings. Click here to learn more about marginal tax rates.
You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.
If you win more than $5,000 in the lottery or certain types of gambling, 24% of your winning must be withheld for federal income tax purposes. You’ll receive a Form W-2G from the payer showing the gross amount of the winning paid to you and the federal income tax withheld. (The payer also sends this information to the IRS.) If state income tax is withheld, that amount may also be shown on Form W-2G. When you file your tax return the next year, these amounts withheld will subtract from the tax you owe.
Since your federal marginal tax rate can be up to 37%, which is well above the standard 24% withheld from large winnings, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments to make up the shortfall— and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.
Wegner CPAs can help
If you’re fortunate enough to hit a sizable jackpot, there are other issues to consider, including estate planning. This article only covers the basic tax rules for casual gamblers. Different rules apply to people who qualify as professional gamblers and those rules have changed with the Tax Cuts and Jobs Act. Contact a Wegner CPAs associate with questions. We can help you minimize your taxes and stay in compliance with all requirements to avoid any surprises.