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Do you like to gamble? If so, then you should know that the taxman beats the odds every time you do. The Internal Revenue Service and many states consider any money you win in the casino as taxable income. This applies to all types of casual gambling – from roulette and poker tournaments to slots, bingo and even fantasy football. In some cases, the casino will withhold a percentage of your winnings for taxes before it pays you at the rate of 24 percent.
Casino Winnings Are Not Tax-Free
Dec 11, 2008 You asked (1) whether legislation has been proposed recently to impose the state income tax on nonresidents ' gambling winnings at Connecticut casinos; (2) if so, which legislators proposed the bills; and (3) whether other states with casinos impose their income taxes on nonresidents ' gambling winnings. Under current law, nonresidents who have gambling winnings from Connecticut. The holding, owning, having in possession of, or paying the tax of a wagering occupational tax stamp issued by the internal revenue authorities of the United States shall be held in all the courts of this state as prima facie evidence against the person holding such stamp in any prosecution of such person for violation of the gambling laws of. That’s because lottery winnings are generally taxed as ordinary income at the federal and state levels (and, where applicable, locally). In fact, in most states (and at the federal level), taxes on lottery winnings over $5,000 are withheld automatically. However, withholding rates vary and do not always track state individual income taxes.
Casino winnings count as gambling income and gambling income is always taxed at the federal level. That includes cash from slot machines, poker tournaments, baccarat, roulette, keno, bingo, raffles, lotteries and horse racing. If you win a non-cash prize like a car or a vacation, you pay taxes on the fair market value of the item you win.
By law, you must report all your winnings on your federal income tax return – and all means all. Whether you win five bucks on the slots or five million on the poker tables, you are technically required to report it. Job income plus gambling income plus other income equals the total income on your tax return. Subtract the deductions, and you'll pay taxes on the resulting figure at your standard income tax rate.
How Much You Win Matters
While you're required to report every last dollar of winnings, the casino will only get involved when your winnings hit certain thresholds for income reporting:
- $5,000 (reduced by the wager or buy-in) from a poker tournament, sweepstakes, jai alai, lotteries and wagering pools.
- $1,500 (reduced by the wager) in keno winnings.
- $1,200 (not reduced by the wager) from slot machines or bingo
- $600 (reduced by the wager at the casino's discretion) for all other types of winnings but only if the payout is at least 300 times your wager.
Win at or above these amounts, and the casino will send you IRS Form W2-G to report the full amount won and the amount of tax withholding if any. You will need this form to prepare your tax return.
Understand that you must report all gambling winnings to the IRS, not just those listed above. It just means that you don't have to fill out Form W2-G for other winnings. Income from table games, such as craps, roulette, blackjack and baccarat, do not require a WG-2, for example, regardless of the amount won. It's not clear why the IRS has differentiated it this way, but those are the rules. However, you still have to report the income from these games.
What is the Federal Gambling Tax Rate?
Standard federal tax withholding applies to winnings of $5,000 or more from:
- Wagering pools (this does not include poker tournaments).
- Lotteries.
- Sweepstakes.
- Other gambling transactions where the winnings are at least 300 times the amount wagered.
If you win above the threshold from these types of games, the casino automatically withholds 24 percent of your winnings for the IRS before it pays you. If you cannot provide a Social Security number, the casino will make a 'backup withholding.' A backup withholding is also applied at the rate of 24 percent, only now it includes all your gambling winnings from slot machines, keno, bingo, poker tournaments and more. This money gets passed directly to the IRS and credited against your final tax bill. Before December 31, 2017, the standard withholding rate was 25 percent and the backup rate was 28 percent.
The $5,000 threshold applies to net winnings, meaning you deduct the amount of your wager or buy-in. For example, if you won $5,500 on the poker tables but had to buy in to the game for $1,000, then you would not be subject to the minimum withholding threshold.
It's important to understand that withholding is an entirely separate requirement from reporting the winning on Form WG-2. Just because your gambling winning is reported on Form WG-2 does not automatically require a withholding for federal income taxes.
Can You Deduct Gambling Losses?
If you itemize your deductions on Schedule A, then you can also deduct gambling losses but only up to the amount of the winnings shown on your tax return. So, if you won $5,000 on the blackjack table, you could only deduct $5,000 worth of losing bets, not the $6,000 you actually lost on gambling wagers during the tax year. And you cannot carry your losses from year to year.
The IRS recommends that you keep a gambling log or spreadsheet showing all your wins and losses. The log should contain the date of the gambling activity, type of activity, name and address of the casino, amount of winnings and losses, and the names of other people there with you as part of the wagering pool. Be sure to keep all tickets, receipts and statements if you're going to claim gambling losses as the IRS may call for evidence in support of your claim.
Oklahoma Tax On Gambling Winnings
What About State Withholding Tax on Gambling Winnings?
There are good states for gamblers and bad states for gamblers. If you're going to 'lose the shirt off your back,' you might as well do it in a 'good' gambling state like Nevada, which has no state tax on gambling winnings. The 'bad' states tax your gambling winnings either as a flat percentage of the amount won or by ramping up the percentage owed depending on how much you won.
Each state has different rules. In Maryland, for example, you must report winnings between $500 and $5,000 within 60 days and pay state income taxes within that time frame; you report winnings under $500 on your annual state tax return and winnings over $5,000 are subject to withholding by the casino due to state taxes. Personal tax rates begin at 2 percent and increase to a maximum of 5.75 percent in 2018. In Iowa, there's an automatic 5 percent withholding for state income tax purposes whenever federal taxes are withheld.
State taxes are due in the state you won the income and different rules may apply to players from out of state. The casino should be clued in on the state's withholding laws. Speak to them if you're not clear why the payout is less than you expect.
How to Report Taxes on Casino Winnings
You should receive all of your W2-Gs by January 31 and you'll need these forms to complete your federal and state tax returns. Boxes 1, 4 and 15 are the most important as these show your taxable gambling winnings, federal income taxes withheld and state income taxes withheld, respectively.
You must report the amount specified in Box 1, as well as other gambling income not reported on a W2-G, on the 'other income' line of your IRS Form 1040. This form is being replaced with a simpler form for the 2019 tax season but the reporting requirement remains the same. If your winnings are subject to withholding, you should report the amount in the 'payment' section of your return.
Different rules apply to professional gamblers who gamble full time to earn a livelihood. As a pro gambler, your winnings will be subject to self-employment tax after offsetting gambling losses and after other allowable expenses.
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About the Author
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.
You’ve beaten the odds and won the lottery. Depending on where you won your prize, the deal is even sweeter, since some states don’t tax lottery winnings. It doesn’t matter if you don’t live in the state in which you won. You will still have to pay their taxes, as well as federal taxes on your prize. Here’s a basic lottery tax calculator so you can figure out what you owe on the state level if anything.
State Tax On Lottery Winnings
Taxes are based on where the winning lottery ticket was purchased, not where the winner resides. If you won the lottery in a state that doesn’t have an income tax, you’ve really hit the jackpot. Florida, Hawaii, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming are the states without income tax. California and Delaware are other especially lucky states for lottery winners since they don’t impose state taxes on such windfalls. Although they aren’t states, winners also aren’t charged taxes in Puerto Rico or the U.S. Virgin Islands. Here is the tax on lottery winnings by state:
- Arkansas – 7 percent
- Colorado – 4 percent
- Connecticut – 6.99 percent
- Georgia – 6 percent
- Idaho – 7.4 percent
- Illinois – 4.95 percent
- Indiana – 3.40 percent
- Iowa – 5 percent
- Kansas – 5 percent
- Kentucky – 6 percent
- Louisiana – 5 percent
- Maine – 5 percent
- Massachusetts – 5 percent
- Michigan – 7.25 percent
- Missouri – 4 percent
- Montana- 6.9 percent
- Nebraska – 5 percent
- New Jersey – 8 percent
- New Mexico – 6 percent
- New York – 8.82 percent
- North Carolina – 5.499 percent
- North Dakota – 2.9 percent
- Oklahoma – 4 percent
- Ohio – 4 percent
- Oregon – 8 percent
- Pennsylvania – 3.07 percent
- Rhode Island – 5.99 percent
- South Carolina – 7 percent
- Vermont – 6 percent
- Virginia – 4 percent
- West Virginia – 6.5 percent
- Wisconsin – 7.65 percent
Aprenda a jogar poker. While Arizona and Maryland tax their resident lottery winners at 5 percent and 8.75 percent, respectively, out-of-state residents winning these state lotteries will have a greater percentage of tax withheld. Five states don’t have lotteries: Alabama, Alaska, Mississippi, Utah and Nevada, wherein lies Las Vegas, the gambling capital of the nation.
Federal Lottery Taxes
The Internal Revenue Service considers lottery winnings as gambling income. Such monies are in the same class as those won in casinos, horse racing and raffles. If you won a big ticket item, such as an automobile, you would have to pay taxes on its fair market value. Report your winnings on Form 1040, line 21, as “other income.” You’ll receive Form W-2G, “certain gambling winnings,” from the payor with the information you’ll need.
You’ll pay taxes at ordinary income rates at the federal level, but if you’ve won more than $5,000, the amount of tax owed is automatically withheld by the lottery authority. If you received a large but not stupendous amount of money, automatic withholding is 24 percent. If it’s a Powerball payout, however, that’s a different story.
Powerball After Taxes
If you won the Powerball lottery, expect to pay 37 percent in federal tax on your winnings, along with any state taxes. That’s the new top tax rate under the Tax Cut and Jobs Act, signed into law by President Donald J. Trump on December 22, 2017. If you won Powerball or other major lotteries before then, you’d pay 39. 6 percent, and that 2.6 percent difference means you keep tens of thousands or even hundreds of thousands of dollars more in your pocket.
If you are a big winner, it’s critical that you receive professional tax advice. This is not a time to try and do this on your own, and remember, you can now afford to hire the best to keep your tax bite as low as possible. That may include making large donations to your favorite charities and receiving a tax break.
Powerball Lump Sum Versus Annuity
Powerball winners can receive their money in two ways, either as a lump sum or through an annual annuity. If you opt for the first method, you won’t get the entire amount if you are the sole winner. With the annual annuity, you’ll eventually receive the entire amount, but it is remitted to you over a period of 30 years of annual payments. Most winners choose the lump sum option, even though they are potentially giving away millions of dollars. Perhaps that makes sense for an older winner who doesn’t expect to live another 30 years, but younger winners should discuss the situation with a tax professional. For example, a Powerball Jackpot Analysis for November 2018, shows a winner could receive $107 million in an annuity, but just $61 million if they decide to take the funds in a lump sum. The winner would receive $3.56 million annually for 30 years under the annuity distribution, paying federal tax of $856,000 plus any applicable state taxes. The bottom line, sans state taxes, is $2.7 million annually. The person going for the lump sum distribution of $61 million pays just over $14 million in federal taxes, for a total of about $46 million not counting state taxes. That’s a nice chunk of change, but over 30 years, the winner who took the annuity will receive a total in the range of $81 million, nearly double the lump sum amount.
Taking the Annuity
When the monetary difference is so great, why do most Powerball winners decide to take the lump sum rather than the annuity? Odds are these are folks who didn’t consult a tax attorney or other financial professional beforehand. They may think an annuity ends when they die, but that’s not the case with Powerball or other major lottery wins. If the winner dies before receiving all of the payments, the remaining payments become part of their estate. There is a downside, however. The IRS will collect estate tax based on the annuity’s future value if the winner dies not long after hitting the jackpot. Powerball has a provision that can convert the annuity into a lump sum if the estate can’t pay the tax owed, but such conversions aren’t permitted in every state. Find out whether this is allowed in the state in which you bought your ticket.
Perhaps you want to enter the world of the mega-rich very quickly, and an income of a few million a year doesn’t quite make it. If that’s the case, perhaps the lump sum is a better alternative, but it’s important that you “protect yourself from yourself,” as the New York Times puts it. There are plenty of lottery winners who end up broke because they made huge purchases with these winnings, and gave money to the long-lost friends and relatives who seem to appear out of the blue when they hear you’ve struck it rich. With an annuity, if you make a bad choice one year, there’s always a big check waiting for you the following year.
Other State and Federal Deductions
If you’re a big winner, but owe back taxes, child support or have student loans outstanding, expect to have those payments deducted from your winnings. If you bought your ticket in a city or county that imposes its own taxes on lottery winnings, you would have those monies deducted as well. On the national level, if you’re not a U.S. resident, you’ll pay a flat 30 percent in federal withholding on your prize money.
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Oregon Tax On Gambling Winnings
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About the Author
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.