The gaming and gambling industry is one of the fastest-growing industries in the US. Online gambling, lotteries and gaming competitions have taken the industry to new horizons. You lose more than you win on gambling. Everyone loses, yet the industry thrives. Claiming unabated losses on gambling or failing to report a jackpot, both can get you an IRS audit.
All Gambling Wins Must Be Reported
Gambling and casino games are cash businesses. Don’t simply assume that if you win a lottery or a casino game that you don’t need to report it. The casinos and other payers need to issue Form W-2G to you. The IRS will get a copy of it too.
Be mindful of reporting all gambling, betting and lottery wins as other income in your income returns with the IRS.
State taxes are also required to report every kind of gambling and betting wins. The IRS also has particular rules on claiming gambling losses, but many states do not allow gambling losses.
Where Did You Win?
It doesn’t matter. Even if you won a gambling bet outside the US, you’ll still need to report it as other income. Online betting and gambling routines leave digital footprints, beware to report those. Your net proceeds from any online gambling win or lottery will likely be transferred to your bank account.
You Won a Single Bet, Lost Many
This is another common misconception with gambling. Say you won $500 with a $50 lottery and lost 3 more on the spot. You can’t simply deduct the $150 and report the remaining balance. Your income and losses from gambling must be recorded separately.
This is particularly important because many people report huge gambling losses on schedule A’s without showing the gambling wins. The IRS is keener on identifying such “recreational” gamblers.
How Much Can You Deduct In Gambling Losses?
Let us assume you had a bad year, your lucky stars didn’t get you any charms. So you filled the tax returns with a lot of gambling losses. Unfortunately, gambling losses are limited for deductions by the IRS. You can only claim itemized deductions.
More importantly, you can claim gambling losses as much as you claim winning income. Say you won $500 on one bet of $100 and lost $1,000 on ten other bets, you can only deduct $500 in losses, not all of the $1,000. Or else, no one will be paying taxes… They’d simply be “losing” in casinos.
The Casino may withhold your Taxes
As we mentioned, the casinos and other gambling owners may issue you a Form W-2G. If you win a specified amount (in different games and bets), the payers will issue you a W-2G. One purpose of issuing the W-2G is to withhold your taxes from the total winning amount.
Currently, the IRS requires the payers to withhold taxes from you as:
28% of the total proceeds, if you won $5,000 or more in gambling
31% of the proceeds if you did not provide the social security number
You can claim the withheld tax in your 1040 form. It will be adjusted against your federal tax liability for the next year.
Keep the Records to Claim
Yes, you’ll need to back your gambling claims with records just like any other form of income or expenses. The IRS will entertain your claims only if you can back your claims. In either winning or claiming losses, you’ll need to provide details and show some recorded transactions.
The record will be particularly important if you wish to claim the losses. Remember, you can only claim gambling losses as much as you can show winning. If you do not show your winning sum, you may end up paying much more in state and federal taxes than you owe. Your tax liability can only be minimized if you back your loss claims with records.
Will You Pay State Taxes On Gambling Wins Too?
You need to report all your gambling wins with state and federal tax returns. State taxes are also applicable to gambling wins. However, in many cases, the state or local tax filing may not get you a reprieve with gambling losses like the federal laws.
What if Gaming and Gambling are your Profession?
If you follow gaming and gambling as a profession, the IRS will treat you as a professional too. Remember, you must qualify certain requirements to be counted as a professional gambler. For example, gambling or gaming must be your primary activity and prime source of income to be registered as a professional gambler.
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