Many people seek to avoid paying taxes on as many things as possible, including gambling winnings. However, gambling winnings are considered a taxable income and must be reported when filing your taxes. All cash prizes, in addition to the value of other winnings, are taxable by the federal, and sometimes, state governments. Hence, you must list all of them on your income tax return. But the good news is, you can also deduct your losses! It is illegal to avoid paying taxes, and doing so will cause the government to fine you, or even put you in jail! This article will help you figure out how to pay your taxes correctly while also learning about how to deduct your losses to help make up for the taxable income.
Since gambling winnings are considered a taxable income, there are some easy ways to report them. The main and the easiest way is through a form W-2G. It is given by the casino and can be used to file the report with your form 1040. On your 1040, you can also deduct your gambling losses as long as you are itemizing your deductions. You must keep accurate records in order to present a case to the IRS should they decide to investigate. They have made all this mandatory just recently because gambling income makes up a large portion of the total income across all households in the USA. Due to increased legalization, the government is making sure that everyone is paying the correct taxes. If you neglect to report income or fail to file a tax report, the IRS may investigate. By keeping accurate books with stubs and receipts of withdrawals and payments to a casino or track, you have a solid foundation.
The good news is that gambling winnings are all taxed at the same flat rate despite their amount. This is one more reason for you to report your winnings. Paying a tax on a large sum of money at a flat rate is better than paying a progressive tax on salary income. If you win more than a certain amount, the casino or the track itself will withhold a tax until your federal taxes are filed. These amounts are:
- $600 or more at a track, provided that the amount is at least 300 times your bet
- $1,200 or more from a bingo game or a slot machine
- $1,500 or more in winnings from keno
- $5,000 or more from a poker tournament
Winning these amounts will guarantee that the establishment gives you a form W-2G. With the W-2Gs and your form 1040, you are ready to report your gambling winnings and deduct your losses. Some table games will not cause the establishment to automatically give you the form though, so be prepared to keep your own records!
Deducting Your Losses
In your standard deduction, the government will often grant you more money than if you itemize. However, itemizing your deductions can be beneficial if you gamble often, frequently, and big. In order to do so, it is important to keep detailed records because of how the government investigates gambling earnings. Your tax professional will know what to do with your records, but keeping all receipts, stubs, and bank statements will be a good start. Also, not every individual bet counts, as a single transaction. However, bets on different combinations are considered different. This creates an issue with taxes if you aren’t too careful since some bets will be considered as one betting transaction, while others will not. This is another reason to make sure your records are clear, so when you go see someone to help you with your taxes, you will be able to provide a full accounting report.
Since gambling winnings are federally taxed and it is illegal not to pay taxes, you should report them correctly. Since gambling losses can offset the taxes paid by earnings, keeping good records is imperative. Your tax preparer will be able to answer any questions and help you with the miscellaneous deductions, including your gambling losses. Following these instructions will help keep you out of jail and away from other heavy penalties while keeping your taxable income to a minimum!