Many people enjoy gambling, whether it’s playing the slots, betting on sports, or trying their luck at the roulette table. While hitting the jackpot can be a thrilling experience, keep in mind that any gambling winnings are subject to taxes. Understanding how much of your winnings will be taxed is critical for anyone who gambles on a regular basis or has won a large sum of money from gambling.
All gambling winnings in the United States are considered taxable income. Winnings from casinos, lotteries, horseracing, and other forms of gambling are included.
The IRS requires winners to report all gambling winnings on their tax return. What is more, these winnings are subject to both federal and state income taxes.
How Much Gambling Winnings are Taxed: Federal Income Tax on Gambling Winnings
In the United States, gambling winnings are subject to federal income tax. The IRS treats gambling winnings as “other income” on your tax return. This means they are taxed at the marginal tax rate, which is the most you will ever pay in taxes on any income. The payer of the winnings will deduct 24% of the total amount for taxes and provide you with a copy of Form W-2G to record the payment. However, this 24% tax is just an estimate. Depending on your marginal tax rate, you may receive some of it back or owe more.
For example, if you earn $20,000 from gambling and are in the 24% tax bracket, you will owe $4,800 in federal income tax. However, depending on whether you are in a higher or lower tax bracket, the tax amount will be higher or lower, respectively.
The IRS, however, only taxes substantial winnings in a legally run game of chance. But what exactly is a significant win in gambling? It is determined by the game. For example, it’s $1,200 or more for slot or bingo wins, $1,500 for keno, and $5,000 for wagering pools, lotteries, and sweepstakes.
State Taxes for Gambling Winnings
Many states tax gambling income in addition to federal taxes paid to the IRS. Each state has its own set of formulas and rules for calculating gambling income, and some do not levy any gambling taxes at all. Some states levy a flat rate, while others base their state tax on the amount you win.
Exceptions to Taxes
Casinos aren’t really obligated to withhold taxes or issue W2-G forms to players who win large sums of money at table games such as blackjack, roulette, and craps, which are all classified as games of skill instead of games of chance.
It is unclear why the IRS has separated the requirements in this manner. However, slot machines are regarded as games of chance, whereas table games are considered to require a level of skill.
In any case, whenever you cash out your chips from a table game, the casino has no way of knowing how much money you began with. This does not relieve you of the responsibility of reporting your winnings to the IRS.
You’ll include the sum of your winnings when you submit your tax returns for the year, instead of when you claim them at the casino. Therefore, it is important to keep detailed records of your gambling activities, including both wins and losses.
How Much Gambling Winnings Are Taxed? Reporting Gambling Winnings
When you file your taxes for the year during which you received a gambling payout, you will report the income and any taxes already paid under “Other Income.” Remember that the 24% tax you already paid was an just estimate. The actual amount you owe (or may be paid back) is determined by your total annual income.
There are currently seven different tax brackets. To move above the 24% bracket and owe additional taxes on your winnings, you must currently have an individual income of more than $170,050 (including your winnings). If the total income was less than $89,075, you may be eligible for a refund.
Your Losses May Be Tax Deductible
If you’ve lost a bet or two, there could be a silver lining: your gambling losses may be deductible. Gambling losses here include the actual cost of wagers as well as related expenses such as transportation to and from a casino or any other gambling establishment.
However, there are a few significant caveats. To begin, unless you are a professional gambler (more on that later), you must itemize to deduct gambling losses. Itemized deductions have to be claimed on Schedule A. Unfortunately, the majority of people do not itemize. This means that you’re out of luck twice: once because you lost your bet and again because you can’t deduct the gambling losses.
Second, you cannot deduct losses that exceed the winnings reported on your tax return. For instance, if you won $200 on a bet but lost $300 on others, you will only deduct the first $200 in losses. You cannot deduct any of your losses if you were completely unlucky and had no gambling winnings for the year.
How Much Gambling Winnings Are Taxed? Taxes for Professional Gamblers
Gambling proceeds are generally considered regular earned income and taxed at the taxpayer’s normal effective rate of income tax if gambling is an individual’s actual profession.
Losses can be deducted as business costs on Schedule C without itemizing. A word of caution, however: An activity is only considered a business if the primary goal is to make a profit and you are constantly and frequently involved in it. A business cannot be formed from sporadic activities or hobbies.
Gambling Tax Requirements for Non-residents
Non-residents of the United States must document gambling winnings on Form 1040NR. In most cases, such income is subject to a fixed tax rate of 30%.
Non-resident aliens cannot generally deduct gambling losses. However, thanks to a tax treaty between the United States and Canada, Canadians can deduct their gambling losses up to the value of their gambling winnings.
Final Word on “How Much Gambling Winnings are Taxed?”
According to IRS regulations, gambling winnings are fully taxable. You can deduct your gambling losses up to the amount of your winnings by choosing to itemize deductions on your tax returns. Gambling winnings and losses must be reported properly on your tax return. Now that you know about “how much gambling winnings are taxed,” it is time to arm yourself with the best game to play at casino to win money.