Gambling winnings must be reported to the I.R.S. as income. In most cases, the payer will issue the winner a W-2G. Prizes, however, must be reported regardless of whether the payer issues a report of winnings. In other words, the taxpayer must report ALL gambling winnings to the I.R.S., whether large or small, legal or illegal, cash or tangible in nature. Lotteries, bingo, keno, slot machine and raffle prizes must all be reported to the I.R.S. Non-cash gambling winnings are reported by their fair market value at the time of the winnings.
Gambling winnings are usually listed on Form 1040, line 21, as “other income.” The winnings are then taxed at a flat rate of 25%.
Taxpayers should avoid netting the winnings and losses when reporting the balance to the I.R.S. In other words, report gambling winnings separate from gambling losses, and report both. Do not merely subtract the losses from the gains to arrive at a reported sum.
Not all gambling winnings are subject to mandatory tax withholding. It is still the taxpayer’s responsibility to report the winnings to the I.R.S. regardless of whether a W-2G is issued. Winnings in excess of $5,000 are subject to a flat rate of 25% withholding. No withholding is required for bingo, keno and slot machine winnings. However, all winnings are reported to the I.R.S. if they exceed certain thresholds. If tax is not withheld from the taxpayer’s winnings, it is a good strategy to make estimated payments to the I.R.S. in order to avoid penalties and interest when the annual tax return is due.
Gambling losses are claimed on Form 1040, Schedule A. Those losses are limited to the amount of the winnings and cannot be carried forward. However, the good news is that gambling losses are not subject to the 2% Adjusted Gross Income floor that limits other miscellaneous deductions.
Gamblers must keep thorough and accurate records. The IRS requires:
· The date and type of specific wager or wagering activity.
· The name and address or location of the gambling establishment.
· The names of other persons present with the taxpayer at the gambling establishment.
· The amount(s) won or lost.
The author, Bryan Corcoran, Esq, is a retired Marine Judge Advocate. He earned his J.D. and Masters in Taxation from the University of Akron in 1997. He is currently a Tax Analysts for Heritage Income Tax. The views expressed in this paper are his own, and are not intended as a substitute for professional tax planning or legal advice.
See IRS Pub. 525
Professional gamblers will report gains and losses on Schedule C.
Those thresholds include $1,200 for bingo and slot machines; $1,500 for keno, and $5,000 for poker tournaments.