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Winning and What it Costs in Taxes


March 2, 2012

Have you ever dreamed of winning the lottery or being a game show contestant because you know you would bring home a lot of money or a new car? That’s what everyone thinks, however, before you get too excited and rush out to buy everything you always wanted, you better do some tax planning.

Nearly all income is taxable and gambling, lottery, awards, prizes, and contest winnings are no exception. How much you are taxed depends upon your income and the state you live in. However, it's safe to say that you'll lose nearly half of your winnings to the IRS.

Generally, the prize-payer will reduce your payout by withholding federal taxes at the 25% rate; however, if you refuse to furnish your Social Security number for IRS reporting purposes, that prize-payer could take as much as 28% of your winnings right off the top for taxes.

Often when the prize is non-cash, such as a car or trip, the fair market value becomes the taxable amount. After the excitement wears off, start considering where you’re going to get the 25% of the prize value to pay the taxes.

You might recall several years ago, Oprah Winfrey decided to give her audience members a new Pontiac G-Six. The sticker price of the car was $28,500 and that was the amount to be claimed for tax purposes. The “free” car ended up pushing most audience members into a higher tax bracket, and costing them as much as $7,000 in taxes. So much for the “free” car.

Usually, a W-2G is issued, and it lists the amount of winnings to report as income on Form 1040, Line 21 Other Income; however, it is the responsibility of the taxpayer to report all gambling winnings as taxable income whether or not a W-2G is received or the amount is less than what is required to report. One dollar won is considered gambling winnings and is taxable.

Here are some of the rules for reporting gambling winnings and withholdings on Form W-2G:

  • Slot machines and bingo: Payouts of $1,200 or more are reported to the IRS, but there are no taxes withheld
  • Keno: Similar to slot machines, but the amount won must be at least $1,500
  • State lotteries and sweepstakes: Withholding is taken out of all winnings of more than $5,000
  • Pari-mutuel pools, including horse and dog races: Subject to withholding, but only if the winnings are both more than $5,000 and at least 300 times as large as the amount bet
  • If winnings are to be split, as with a lottery pool, winners are reported on Form 5754. This is common when a group goes together and buys lottery tickets. Only one ticket wins and is cashed in by one person. Form 5754 will allow you to distribute the winnings equally among the group and pay taxes on your share
  • The withholding rate for nonresident aliens is 30%. So, if a citizen of a foreign country wins $1 million cash at a slot machine in Las Vegas, he will find he is paid only $700,000. The remaining $300,000 is sent to the IRS. The foreign citizen is unlikely to ever file an income tax return, but the IRS gets paid in full anyway.
  • Nevada casinos convinced the IRS that they could not keep track of players at table games. They said that when a player cashes out for $10,000, they do not know whether he started with $25 or $25,000. So it is actually written into the law that there is no withholding or even reporting of big winnings to the IRS for blackjack, baccarat, craps, roulette or the big-6 wheel.

You can reduce the amount of money the IRS will tax by reporting your losses as part of your overall itemized deductions. Report any gambling losses on Schedule A, Line 28, Miscellaneous Deductions. You can claim losses up to the total amount of winnings you report as income on Form 1040, essentially making it a wash.

You have to make sure this deduction, along with your other itemizations, is more than the standard deduction. You always want to use the larger deduction that benefits you the most.

While you might be able to wipe out taxes on $3,000 you won by claiming $3,000 in losses, but that's less than the standard deduction of $5,800 for a single taxpayer on 2011 returns. If you have don’t have other deductions to itemize with, it is best to take the standard deduction and not claim the gambling losses. If you have enough deductions to itemize, then take full advantage of filing Schedule A and claim the gambling losses up to the amount won.

Keep track of your gaming losses

If you do claim your gambling losses on your tax return, it's a good idea to keep a record of them.

The IRS will accept a written log detailing the date of your wagers, the location, amount of the bet, type of gaming, and wins and losses as documentation. You should also keep any losing lottery tickets, gambling receipts, statements, or other records that show both your winnings and losses.

Before you celebrate the “big win”, put some aside for Uncle Sam because if you win, he wins!

PRO-TAX tax professionals can help you determine if it is beneficial to claim your gambling losses and reduce your tax liability. Plan your visit to a local PRO-TAX office today.

We’ll see you at the races…