You must report and pay a tax on gambling winnings. This tax applies to all forms of income earned from gambling, including lottery winnings, raffle winnings, proceeds from bets on races or sporting events, and winnings earned at casinos. You must report earnings of any monetary value. This means that you must report cash prizes and any non-cash prize, such as a car or vacation. Thankfully, you can deduct gambling losses as well, which often helps to even out the taxation.
How to Report Gambling Winnings
You will receive a Form W-2G from an institution that has issued your gambling prizes. This is issued whenever the winnings are subject to federal withholding. If the institution does not issue this statement, you are not absolved from reporting your winnings. You must report them on your Form 1040. Even non-taxable gambling winnings must be reported to prevent criminal activity. If you are not certain whether you must pay withholding, see Publication 505. This IRS publication refers to "Tax Withholding and Estimated Tax."
How to Pay Gambling Winnings
The United States income tax system operates on a pay-as-you-go basis. Unlike other taxes, such as capital gains tax, the income tax is paid immediately when you earn money. With gambling winnings, you may elect to have taxes immediately withheld. If this is not an option, you must pay estimated taxes on a quarterly basis. You do not have to fill out forms to report income in order to turn in estimated taxes. You will simply fill out a quarterly 1040 and send a check in the amount you think you will owe. At the end of the year, you will file all forms pertaining to your actual earned income. At this point, the IRS will either request more funds from you or issue a return. Remember: most state income tax is also pay-as-you-go. You may be required to send in two checks each quarter.
How to Deduct Gambling Losses
You can deduct your gambling losses if you are a taxpayer who itemizes deductions. Claim all losses as a miscellaneous deduction on your Form 1040, Schedule A. This deduction is subject to the 2 percent limit, and you may not deduct more than you have reported as winnings in a given year. For example, if you go to a casino and win $200 and then lose $100, your net earnings for the day will be $100. You will pay taxes on only this $100 by reporting the $200 gain on your 1040 and the $100 loss on your Schedule A. However, if you go to a casino and win $200 and then lose $300, your net for the day will be negative $100. You will report the $200 on your 1040 and then deduct only $200 on your Schedule A. For questions on how to deduct gambling losses, refer to form 529 on "Miscellaneous Deductions." Remember to keep a detailed record of your wins and losses in order to assure that you can deduct properly and pay taxes on only the sum you take home in winnings.
What is the tax rate on gambling winnings?
The majority of gambling winnings are taxed at a flat 25 percent rate. If you win more than $5,000, your income tax rate may be used to assess taxes against your gambling winnings. You must report all winnings on a 1040 when you receive a Form W-2G from the institution issuing the payment. Certain winnings, such as those from bingo, keno and slot machines, may not be subject to taxation. However, you must still report all the income you have won, including that not subject to withholding, in order to assure that you are reporting correctly and not avoiding payment.