Paying Income Tax on Gambling Wins in the USA
Ever considered what tax you might owe from that win on the office pools? That money you made in Las Vegas? No? Well the IRS probably have and they are certainly within their rights to claim tax off the earnings you make when gambling.
Even when you only make a few dollars from your gambling exploits, the IRS consider any money you make as taxable income. It is highly unlikely that the IRS will come knocking on your door for that $10 lottery win, it is not worth the paperwork for them, but sometimes even the most innocuous of gambling wins becomes a lot more formal.
If you are gambling on a regular basis, be that on the football, in casinos or on the lottery, you should consider keeping a gambling log for when (or if) the IRS comes a-calling for their money.
The following is a list of considerations that you should bear in mind when keeping a paper-trail of your gambling expeditions.
HOW YOUR GAMBLING HABITS ARE DOCUMENTED BY THE GAMBLING COMPANIES YOU USE
Gambling operators are legally obliged to keep records of every win they pay-out over a certain threshold, be that at a casino, a race-track, lotteries…
When it comes to odds betting, such as for horse racing or the lottery, then every time a win of more than $600 is won, and providing this is more than 300x the original bet, then that win must be reported to the IRS.
If you happen to be one of the lucky people who win such a bet as listed above, then you should be asked for your Social Security information by the gambling company at which you have won, they do this so that they can inform the IRS of your win. In addition, you will be given a copy of a form known as the W-2G that is used to document the win formally.
Luckily- or unluckily depending on your view- you may be deducted tax there and then, I say lucky because this means that you do not need to do anything about the issue yourself, it is done for you.
If for whatever reason, you do not wish to surrender your Social Security number, perhaps you do not trust the venue well enough, then the gambling company will keep 28% of your winnings in order to pay for federal taxes in that state.
In addition, the rules also apply to non-cash prizes over a value of $5,000, that Dodge Viper you won in Las Vegas, for example. In this case, either you or the gambling operator is responsible for ensuring that the correct tax amounts are paid. If it is the operator who foots the bill, then that will be reported to the IRS as your income too.
The smaller amounts that you win when gambling does not necessitate the use of a W-2G form and it is up to you to keep a track on your smaller wins. You can document these wins on your 1040 form under the “other income” heading.
working out what you owe can be tedious
DOCUMENT YOUR LOSSES TOO
You are also able to deduct your gambling losses when calculating the amount that you owe the IRS, however, you are only able to deduct an amount up to the value of your winnings within a particular financial year. For example, if you only win $3000 in a financial year, you are only able to deduct $3000 as losses for that year, regardless of whether you have lost more money than that.
You must also maintain an itemised log of your gambling losses, although deducting these losses from your IRS payments is not necessarily worth the hassle.
There is what is known as a standard deduction in the US and if your standard deduction amount is greater than the amount that you lost gambling then you should choose to deduct the standard amount rather than the losses incurred. For example, if your standard deduction amount is $5000 and your losses are only $3000, it is clear that you are better off deducting the greater amount.
It is fairly probable that the IRS will ask for evidence of your wins and losses so make sure that you keep the paperwork that will allow you to support your claims.
The IRS advises people to keep a diary including the following information:
-The type of game played.
-The date when the win/loss occurred
-The contact details for the gambling operator, including name and address.
-The name of anybody who was with you at the time and who can support your claim.
-The amount that you win or lose.
It is also worth keeping any other documentation you may be in receipt of, such as losing/winning tickets, bank statements with the relevant transactions, a W-2G form…
The above advice is particularly relevant if you are a frequent gambler. And, if your return is subject to audit, the IRS may ask for additional smaller winnings or complementary rewards you may have received (complementary rewards may be hotel rooms, meals, drinks, etc).
CONSIDER THE QUESTION OF WHETHER YOU ARE A PRO GAMBLER
You may feel that it is acceptable to deduct peripheral gambling costs, such as travel and accommodation, as business expenses if you make money from gambling. However, the frequency with which you gamble does not dictate whether or not you are considered a professional gambler by the IRS.
In order to be considered as a professional gambler by the IRS, you need to be able to show that you are a regular gambler and that you earn your income from it. You need to be able to show that you treat gambling as a career, taking the same steps you would need to take in any business venture, keeping appropriate records for example.
If you claim gambling costs as part of your business expenses but the IRS does not recognise it as a business then you are likely to be penalised for your error.
If the IRS decides that you can qualify as a professional then you will be able to deduct gambling costs, but you will still not be able to deduct gambling losses so you must consider carefully the price of gambling to you and whether it is worth going professional.