Congratulations on your big win! Whether you played your cards right, picked the right horses, or just got plain lucky, you can bet that the IRS would like to know about it. But how do you know what needs to be reported? What about losses?
Under the Internal Revenue Code, all income is taxable regardless of its source or amount, with certain exceptions. Whether you made $100 at the slot machine, $1,000 at the race track, or $1,000,000 in the lottery, all of these amounts are taxable and should be reported on Line 21 of your Individual Income Tax Return. However, gambling losses may only be deducted up to the amount of winnings reported. These are reported as itemized deductions on Schedule A of Form 1040.
Generally, the entity who pays out the winnings (i.e. the casino, race track, lottery, etc.) will issue a Form W-2G if you receive certain gambling winnings or have any winnings subject to income tax withholding. The form reports the amount won and any tax withheld along with details on the transaction, and is issued based on the requirements of the specific type of activity, shown below:
- Bingo or Slot Machines: $1,200 or more in winnings per session
- Keno: $1,500 or more in winnings (net of the amount wagered)
- Poker Tournament: $5,000 or more in winnings (net of the amount wagered or bought-in)
- Horse Racing, Lottery, and Other Winnings Not Listed: $600 or more winnings when the payout exceeds the amount wagered multiplied by 300
For this last category, a requirement to withhold 25% of gambling winnings may apply if the amount exceeds $5,000 and is from one of the following:
- Wagering pools
- Lotteries that are not state-conducted, or
- Transactions involving horse or dog racing if the winnings exceed the amount wagered multiplied by 300.
If a group of players is involved in sharing winnings that are reportable on Form W-2G, each person can list their name, social security number, and respective share of winnings on Form 5754, which will then be used by the payer to issue Form W-2G to each winner for the correct amount.
It is essential to keep an accurate record of gambling winnings and losses. The IRS has maintained that records kept should contain information such as the date and type of wagering activity, the name and address of the establishment where wagers were placed (i.e. casino, race track), and the amounts won or lost. For example, if the activity is horse racing, track any wagering tickets received and keep the tickets not cashed for your records. At the casinos, keep track of the amount wagered and won. Many casinos are able to do this for you if you have a rewards or a player’s account with them.
If you have any questions regarding the taxability of gambling income, or any other tax matters, please do not hesitate to contact your L&B professional at (858) 558-9200.