TAXES ON GAMBLING WINNINGS. HOW DOES IT WORK?
The IRS is the major tax authority in the United States of America. They are responsible for tax collection and carrying out any other activities that are required to ensure that the collection of taxes is done. The IRS collects taxes on income, sales, capital gains, etc.
Income tax is charged directly on a taxpayer’s income. Both federal and state taxes are charged on this income and deductions are made directly from the paycheck.
Sales tax is charged on the sale of goods in the USA and it is administered by the individual states at different rates. Other income which is taxed by the IRS include winnings from gambling, casino or any form of wagering.
If you enjoy gambling and are lucky enough to win, your winnings will also be subjected to tax by the IRS.
HOW ARE GAMBLING WINNINGS TAXED?
If you are planning to travel to Las Vegas (one of the biggest destinations for gamblers) or Nevada, then it is very important that you understand all the tax laws concerning gambling, to prepare you ahead for when you make a big win.
The first thing to note about gambling taxes is that they are not progressive. Unlike income taxes, gambling taxes are at a fixed rate (currently 24%) and do not change as your winnings increase. If you win at a casino, the casino will most likely withhold 24% of your win and require that you file a W2-G form to document your winnings to the IRS.
To the IRS, gambling income is any valuable item or amount of money won from the act of gambling or wagering. This includes winnings from game shows, casinos, lotteries, etc.
Generally, casinos do not report to the IRS on small winnings. However, there are certain cases that require the casino to report a win to the IRS directly.
For horse track, if the amount exceeds either $600 or is three times the initial amount wagered, then the casino has to report it. For bingo, if the winning exceeds $1200 then the casino will have to report it. For poker, all winnings exceeding $5000 have to be reported.
GAMBLING LOSSES.
A gambler may deduct gambling losses only if they have itemized those deductions on a schedule form on the IRS website and keep such records of the winnings and losses. It is important to note that the number of losses reported should not be greater than the amount of income reported, if not it will be rejected.
TAXES ON GAMBLING FOR NON-RESIDENTS.
Non-residents of the USA are required to report their gambling winnings to the IRS on Form 1040NR on the IRS website. All income reported will be taxed at 30% flat. However, due to the treaty signed by the USA and Canada, Canadians can deduct their losses up to their winnings if they are gambling in the USA.
HOW TO REPORT YOUR GAMBLING WINNINGS.
If you have just won money at a casino or from any of the listed games and lotteries considered as gambling income by the IRS then here’s how to go about reporting it.
1. FILL A FORM ON THE IRS WEBSITE TO REPORT YOUR WINNINGS: Regardless of whether or not the casino or entity has reported your winning, the IRS requires that the taxpayer reports the full amount of winning without any deductions to them.
2. DO NOT SUBTRACT YOUR INITIAL COST:
Some gamblers usually deduct the initial amount used to play a bet, or wager as a cost of gambling. This is not recognized as a loss by the IRS and so should not be deducted. Since gambling is not an essential activity it is assumed that the gambler can afford the initial cost. Hence, it will not be recognized as a deduction.
3. FILL A FORM W-2G: for smaller winnings, the taxpayer is required to fill a form 1040. However, if it is a big win, the IRS requires that you file your win under the form W2-G.
To qualify for this form, one must have:
a. Won $600 dollars or more in a horse race.
b. Won $1200 dollars or more at a bingo game
c. Won $1500 dollars or more at a keno game
d. Won $5000 dollars or more at a poker game
It is important to note that table games like roulette, baccarat is exempted from this rule. This doesn’t exempt income won from them from taxes, it just means they won’t be required to fill a W2-G form.
4. YOU CAN DEDUCT LOSSES: To deduct your losses according to the IRS, you must itemize your deductions to claim losses as a deduction.
You are also allowed to make deductions only up to the amount of gambling income made. Any deductions exceeding that will be rejected.
FOR PROFESSIONAL GAMBLERS.
If you have perfected the art of gambling and you now confidently earn a living from it, then the IRS rules are just a little bit different for you.
First, if you gamble often with the intent of making a profit and frequently earn from it, then the IRS considers it your day job and taxes your income as a self-employed individual.
Hence, you are allowed to deduct other costs, such as costs of carrying out your business, thereby reducing your overall taxable income.
WHAT HAPPENS IF YOU DON’T PAY TAXES ON YOUR GAMBLING WINNINGS.
Legally, there are no major penalties if you gamble, win, and fail to report your winnings, especially for winnings below $1200, especially for the first time. However, if you fail to subsequently subject your winnings to tax the IRS will notice and will come knocking.
The IRS will likely send you a notice to inform you that they have noticed a discrepancy on your file. You will be given a time frame to rectify this and pay up the amount you owe in taxes.
If this is ignored you may eventually receive a court summons by the IRS to appear in court. This is hardly ever the case as it is advised that you pay up the tax owed instead of incurring extra costs on litigation due to your failure to remit the correct amount of tax on your winnings. You may also receive a penalty for not complying with the tax law and for being difficult, this may cost you even more than the initial amount owed. Hence, it is best to pay up the tax on your winnings as at when due.
CONCLUSION.
Getting in trouble with the tax authority for evading tax is not a good look for you. Instead of going through the hassle of paying penalties, appearing in courts, etc, rather file the correct amount of winnings, apply for losses and deductions if you are eligible, and pay up. Paying taxes is important, without taxes it is almost impossible for the government to correctly carry out its activities efficiently. Hence, when taxpayers refuse to pay tax, it is a big offense as it is considered that you are preventing the government from working. You may end up paying interest on the tax, paying a penalty, and in extreme cases, going to jail. All of these may be avoided by taking your civil duties seriously and simply paying all of your taxes at the right time. If you believe there may be mistakes and you doubt you owe that much you may want to get professional help to avoid having to pay what you don’t owe.
