As a taxpayer, you're probably used to the IRS getting a share of your income. But unfortunately, the agency's reach extends to whatever additional income you bring in, including gambling winnings. If you have a good day at the track or casino, you should know that your winnings are indeed taxable at the federal level, and depending on where you live, you might pay state taxes as well. And it doesn't matter how much you win either -- you're technically required to report all of your gambling winnings and pay taxes accordingly.
Taxes on gambling winnings
It's nice to walk away a gambling winner, but before you start making plans to spend your newfound fortune, remember that the IRS is also due its share. You're required to pay taxes on cash winnings from things like:
- Lottery payouts
- Poker tournaments
- Horse races
- Slot machines
You're also required to pay taxes on non-cash winnings. If you win a vacation or a new automobile, you'll need to take the fair market value of your prize and include it as income on your tax return.
Any time you win money, even if it's a seemingly negligible amount, you're technically required to report it and pay taxes when you file your return. However, there are strict reporting requirements for winnings that meet these thresholds:
- $600 or more at a track, provided that amount is at least 300 times your bet
- $1,200 or more from a bingo game or slot machine
- $1,500 or more in winnings from keno
- $5,000 or more from a poker tournament
Now the good news is that unlike income taxes, gambling winnings aren't subject to a progressive tax. This means that you'll pay the IRS the same percentage on $5,000 in winnings as you would on $100,000 in winnings. Generally, if your winnings meet or exceed the above thresholds, the casino or establishment in question will withhold 25% of your winnings in taxes before paying you your share. If that's the case, you should receive a Form W2-G summarizing each payment or transaction.
Not all gambling winnings, however, are subject to Form W2-G, even if they do meet or exceed the aforementioned limits. Winnings for table games like craps, blackjack, roulette, and baccarat don't require a Form W2-G, but this doesn't mean you're exempt from paying taxes on them. Rather, you'll need to prepare to pay those taxes yourself when you file your return.
Furthermore, in addition to paying federal taxes on gambling winnings, you may be required to pay state taxes as well. Each state has its own distinct set of rules for taxing gambling winnings, so be sure to pay attention to local requirements when filing your taxes.
Deducting losses from winnings
Just as you can use investment losses to offset gains, so too can you write off gambling losses. The only catch is that you'll need winnings to deduct them from; you can't simply write off gambling losses against your regular income. Furthermore, you can only deduct gambling losses if you itemize on your tax return. But if you win $5,000 at the slots one day but then take a $5,000 gambling loss later that year, you can use that loss to cancel out your winnings and avoid paying taxes on them.
Whether you win or lose at gambling, always make sure to keep a detailed record of what transpires, including the dates you gamble, the games you play, and their respective outcomes. Doing so can help ensure that you don't make a mistake on your return that could otherwise land you in hot water with the IRS.