Any earnings won from gambling, betting, and playing lotteries are taxable income, even if that income is from illegal activity.
Generally, the IRS requires payers to withhold 24% of your winnings for income taxes if you win more than $5,000 on a bet and the payout is at least 300 times the amount of your wager.
Winnings from keno, bingo, slot machines, and poker tournaments are subject to special withholding rules. The amount withheld will be listed on Box 4 of the W-2G form you will receive. Under penalty of perjury, you’ll also need to sign the W-2G stating that the information listed on the form is correct.
Include the amount withheld on your 1040 next year as federal income tax withheld. It will be deducted from your tax bill. You’ll also need to attach the W-2G form to your return.
It’s the same when you bet at a casino, racetrack, sports betting parlor, or with any other legally operating gaming business. Don’t expect your buddy or the accountant who runs an office pool to withhold taxes (although technically, they should).
Is it Possible to Deduct Gambling Losses From My Income?
Did you lose at the blackjack table or pick the wrong horse to win? You might be able to deduct your gambling losses if you lose a bet or two. Gambling losses include the actual expenses of wagers plus any related expenses, such as travel to and from the casino.
However, there are a few important catches. To deduct your gambling losses (itemized deductions are claimed on Schedule A unless you’re a professional gambler), you must itemize. However, most people don’t itemize. If you do choose to claim the standard deduction, you’re out of luck two times- once for losing your bet and once for being unable to deduct your gambling losses.
In addition, you cannot deduct gambling losses that exceed your winnings. As an example, if you won $100 on one bet but lost $300 on a couple other bets, you can only deduct the first $100 of losses. You can’t deduct any losses if you were totally unlucky and had no gambling winnings for the year.
It’s possible to deduct your losses as business expenses on Schedule C without itemizing them if you are a professional gambler. An activity only qualifies as a business expense if its primary goal is to make earnings and you’re continually and regularly involved in it. Sporadic hobbies or activities do not qualify.
Gambling losses may only be deducted to the extent of gambling income, and gambling losses may not exceed gambling income.
A taxpayer may use losses from one instance of gambling activity to offset gains from another type of gambling activity. Taxpayers may offset losses incurred from playing the lottery against income earned from winnings from horse races, for instance.
Losses must be reported differently depending on whether the person is a professional gambler or not:
- Non-Professional: For individual taxpayers who are not pro gamblers, gambling losses are miscellaneous itemized deductions subject to a 2% adjusted gross income (AGI) limitation.
- Professional Gamblers: For professional gamblers, gambling losses are treated as business expenses, but they can only be used to offset gambling winnings and not other income.
Can I Deduct Gambling Expenses From My Income?
Usually not. Gambling expenses, such as a car rental, hotel room, and meals, are not deductible personal expenses. If the taxpayer is in the trade or business of gambling, like a professional poker player, then they can deduct “ordinary and necessary” gambling expenses as business expenses. In addition, these business expenses can only be used to offset gambling winnings and not other income.
Can I Use Gambling Losses That Were Disallowed in Previous Years?
No. Any gambling losses in excess of gambling winnings cannot be carried forward or back to offset any other income. A taxpayer can only use losses in the year in which they are incurred.
Can I Report Winnings and Losses Separately?
Winnings and losses from gambling must be reported separately.
Imagine that you bet $100 on four different horses to win a race. When you win $500 for one bet, you must report the entire $500 as taxable income. Gambling winnings ($500) cannot be reduced by gambling losses ($400), and only the difference ($100) is reported as income. If you itemize, you can deduct $400 for your losses, but your winnings and losses must be handled separately on your tax return.
Maintaining a journal or similar record of your gambling activities can help you keep track of how much money you have won or lost over the span of a year.
If you keep records, you should include the dates and types of specific wagers or gambling activities, the name and location of each casino, racetrack, or other gambling establishments you visited, the names of other people with you, and the amounts you won or lost.
You should keep other items as proof of gambling winnings and losses. Hang on to all W-2G forms, wagering tickets, canceled checks, credit records, bank withdrawals, and records of actual winnings or payment slips given by casinos, sports betting parlors, racetracks, or any other gambling establishment.
What Is the Audit Risk?
Don’t forget that the IRS receives a copy of the W-2G form along with your gambling winnings. In other words, the IRS expects you to claim those winnings on your tax return. In the event that you do not, the taxman will not be pleased.
Considerable gambling losses can also raise red flags with the IRS. Casual gamblers can only deduct losses on Schedule A up to the number of their winnings. If you claim more losses than winnings, it’s a slam dunk for IRS auditors.
Don’t forget to be careful when deducting losses on Schedule C. Tax authorities are always on the lookout for alleged “business” activities that are really just hobbies.
Do State and Local Taxes Apply?
Form W-2G includes boxes for reporting state and local winnings and withholding. Additionally, you may have to pay state and local taxes on your gambling winnings.
Your state taxes all your income, including gambling winnings. In contrast, if you gamble in another state, you might be surprised to know that the other state gets to tax your winnings, too. To ensure they get what they’re owed, they could withhold the tax from your payout.
You wouldn’t be taxed twice, though. You should be able to claim a tax credit from the state where you live for the taxes you pay to another state.
Gambling losses may or may not be deductible on your state tax return. You should check with your state tax department.
Do I Need an Attorney?
We live in a complex and ever-changing world of tax laws. There are several tax preparation companies and software programs on the market that may assist you with your tax questions. However, they cannot deliver the same level of service that an experienced and knowledgeable tax attorney can. It would be wise to consult with a local tax lawyer if you aren’t sure about the characterization of your expenses or if you need someone to represent you before the IRS.