Summertime – Gambling – the IRS?

It may be summertime but the IRS
hasn’t forgotten you. The latest IRS Tax Tips article talks about your summer trip to Las Vegas
or an afternoon at the racetrack (the racetrack season starts here in San Diego on Wednesday!) or
a weekend at a local casino. The article reminds you that no matter how little
you win or the type of bet, you are required to report the income on your tax
return.

 

“How will the IRS know?” is often the
first reaction of folks about this subject. Oh, the IRS will know. If you
play bingo or the slot machines (the quarter slots are my favorite) and you hit
a jackpot for at least $1,200 (that’s a lot of quarters), your winnings will be
reported to the IRS on a Form W-2G.

 

If you bet on horse racing, your
state lottery or a local sweepstake, your win will be reported to the IRS if
it’s at least $600 and the winnings
are at least 300 times the amount of the wager. This also applies to church
raffles, charity drawings, and the like. 

 If you win $1,000 but you paid $100
for your sweepstake ticket, the $1,000 won’t be reported on a W-2G (the winning
was only 10 times the wager of $100). But if you win a $1,000 and only paid $1
for your ticket, the payer will report it to the IRS for you.

 

The IRS doesn’t just stop at having
the payer fill out a W-2G in your name with the winnings. In most cases, if the
winning is more than $5,000, the payer has to withhold 25% of the winnings and
send it to the IRS as withholding. If
you’re lucky enough to win $10,000 in your state lottery, you’ll only receive a
check for $7,500. The remaining $2,500
($10,000 times 25%) will be sent to the IRS. In January of the following year,
you’ll receive a W2-G showing taxable income of $10,000 and withholding of
$2,500.

 

If you have a “noncash” win, like a
car, you will still be taxed on the car’s Fair Market Value (FMV) and there will
be 33.3% withholding if the FMV is more than $5,000. It gets confusing on how you pay the
withholding. You can write a check for
the withholding and give it to the payer to be forwarded to the IRS. Or the payer can pay the withholding for you.
In that case, the amount of the withholding will be added to your taxable income
on the winning. If the FMV of the car is $20,000 and the payer sends the IRS
$6,660 of withholding for you, the W-2 G will show winnings of $26,660 ($20,000
+ $6,660) and withholding of $6,660.

 

Oftentimes, folks “pool” money
together to buy a lottery tickets. Regardless of how many folks are in the pool,
there is just one ticket that wins. Whoever turns in the winning ticket needs to be sure that a Form 5754 is
filled out. This form will show the
information of all the winners on that ticket. If it’s not filled out, whoever turns in the ticket, will be taxed on the
entire winning.

 

Now you’re probably thinking “but
what about all that money I spent on the lottery all year and lost.” There’s good news and bad news here. You can deduct your gambling losses whether
related to your winning or not. If you
have a lot of race track losses but win your state lottery, those race track
losses are deductible. Be sure to keep the receipts and it’s best to keep a
journal or diary of your winnings and losses.

 

Now the down side. You can’t deduct
more losses than winnings so if you had no winnings, you can’t deduct any
losses. If you won $700 but had $2000 in losses, you can only deduct $700 of
losses. This $700 would be reported on your Schedule A, under Other
Miscellaneous Deductions (not subject to the 2% limitation).

 

So that’s the end of my preaching
about the tax law and your winnings. I
don’t want to ruin your enjoyment iwhen winning the lottery but I don’t want you
to be shocked in February by what you may owe the IRS. Have a great vacation!

 

 

For more information:

IRS Tax Tips –
Gambling Income and Expenses

 

IRS Form
W-2G

 

IRS Summertime Tax Tip

 

TurboTax – Entering Gambling Losses 

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