Summertime – Gambling – the IRS?

Tax Tips

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 when 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

IRS Summertime Tax Tip
TurboTax – Entering Gambling Losses