About 65% of the American public likes to gamble with an occasional toss of the dice or pull on the handle. In fact, researchers estimate that about $910 billion or more is spent on gambling of some form or another annually, and that does not include the $65 billion a year spent on lottery tickets. Add up all of the revenue produced every year by cruise ships, music revenues, sports, theme parks, and movies, and this total is still less than what gambling generates in one year. This is pretty significant money being spent by a large portion of the population. And of course, there is a tax consequence!
When You Gamble and Win
No matter what type of gambling you might do, all of your winnings are taxable. Casino winnings often have special taxes assessed by the federal and state governments, so this is an area in which you need to tread carefully. Sometimes, the casinos can withhold federal taxes (Form W-2G), but sometimes you are responsible for reporting that gambling income and paying tax upon it. This includes your gains from horse racing, casino games, raffles, and lotteries.
If the casino issues you a W-2G, that form will show what type of game you played, how much you won, and if they withheld taxes from your winnings. Regardless of whether you receive this form or not, you MUST report all winnings on your income tax form. It will be listed on the line “Other Income” of your 1040.
When You Lose
Now if you have had gambling losses (and who hasn’t), you would report these on Schedule A, Itemized Deductions. You can only deduct losses up to the amount that you have won. So, if you won $2 but spent $40 winning it, you only have a $2 loss. Here is where you can have a problem. You must report your full winnings as Other Income, and if you deduct losses, you can only deduct losses up to the amount you have won on your Schedule A. However, you can’t just deduct losses from winnings, and report that number. The IRS will not allow that.
As always, you must keep accurate records of your gambling expenditures. You need to keep receipts and other documentation of your gambling activities, and in this case, it is also good to keep some type of written record, such as a diary, to chronicle your wins and losses.
The Big Boom of Lottery Taxes
Lottery winnings are taxed somewhat differently, for before you even receive a payout, Uncle Sam and your state will probably receive about 30% of what you win. The state tax bill will differ according to your state of residence. In addition, your tax bill will depend upon how you receive your lottery winnings: annually or in a lump sum. If you should be lucky enough to win the lottery, be smart enough to enlist a tax lawyer to assist you through the labyrinth of tax rules for lotteries. Your tax lawyer can also assist you in setting up your tax advisory team, which is absolutely necessary in the case of big winnings.