Tax Casino Winnings Usa
Of course, the US federal government always wants a cut. It demands 24% of your winnings through federal taxes. However, states vary on how they tax gambling income. Some are much worse than others due to their high rates. Casino Winnings Are Not Tax-Free Casino winnings count as gambling income and gambling income is always taxed at the federal level. That includes cash from slot machines, poker tournaments. The Internal Revenue Service considers lottery money as gambling winnings, which are taxed as ordinary income.The total amount of tax you pay on your lottery winnings will depend on multiple factors, including the state where you live and whether you take the winnings as a lump-sum payment (one check for the full amount after taxes have been withheld) or an annuity (smaller annual payments. Online gambling is unregulated in most regions of the US, but taxes must still be paid. Just because you do not receive tax forms, does not mean that your winnings are not taxed. To the IRS, it does not matter where the money is either.
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If you win a sweepstakes or contest prize, you will owe income taxes to Uncle Sam and perhaps your state. Prizes are considered taxable income regardless of whether the prize is in the form of cash, trips or merchandise. If you win a prize valued over $600, the sweepstakes or contest sponsor must report the value to you and the Internal Revenue Service on a Form 1099-MISC. You’re still supposed to report and pay tax on prizes under $600.
Addition to Income
Prizes and awards will increase your tax bill, but the question of how much depends on the value of the winnings and the amount of your other income. Prizes are taxed as ordinary income. That means you add the prize value to the income you received from your job and other sources during the year. Sometimes, a sponsor will include a cash award to help cover taxes on the prize, but the cash also is taxable income to the winner. The prize value will increase your federal adjusted gross income, which likely will increase your net taxable income after you take your exemptions and deductions. The prize win could push you into a higher tax bracket. Your federal adjusted gross income is the starting point for most state income tax returns so the value of the sweepstakes prize within your federal AGI could increase your state taxable income.
State Taxes
You will have to pay state income tax on your winnings in 39 states. If you live in one of the 11 states that don’t tax sweepstakes prizes, you may be spared state income taxes. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming have no state income taxes. Additionally, California, Delaware, New Hampshire and Pennsylvania don’t tax winnings on sweepstakes or other gambling. But if you live in a non-taxable state and win a sweepstakes based in a taxable state, you may have to file a tax return with the taxable state where the sweepstakes is based. If you are unsure about whether you will owe state tax on your big win, ask your state's tax collection agency.
Tax Withholding
If the sweepstakes prize is worth more than $5,000, the sponsor must withhold 25 percent of the prize value for federal taxes and may have to withhold state taxes as well. But if the prize is a car or other expensive merchandise, you may be required to give the sponsor the cash to pay the federal tax withholding before the sponsor will release the non-cash prize to you. For instance, if you won a $25,000 car, you may have to give the sponsor $6,250 for the federal tax withholding before the sponsor will give you the car. You may also have to pay state withholding up front. The sweepstakes sponsor could choose to pay the federal tax withholding, but if it does, the sponsor’s withholding rate is one-third of the prize’s fair market value.
Valuing Prizes
If your prize is a non-cash award such as a trip or a car, you will owe tax on the fair market value of the prize. There is no uniform method for determining fair market value. Neither the U.S. tax code nor U.S. Tax Court rulings have specified the proper way to set the fair market value of a non-cash prize. The sweepstakes or contest promoter will report what it considers to be fair market value. That figure may be different from the “approximate retail value” the sponsor cited in sweepstakes advertising. But the sponsor’s fair market value figure may be subject to dispute. For example, parties could dispute whether the fair market value of an automobile is the manufacturer’s suggested retail price or the discounted price the sweepstakes sponsor paid to buy the car.
Exempt Prizes
You can avoid all taxes on a prize if you refuse to accept it. A prize may not be taxable if it meets certain legal tests. To be tax-exempt, the prize must be in recognition of personal achievement in religious, scientific, literary, artistic, charitable, educational or civic affairs. You cannot have nominated yourself for the prize or submitted your own work for review. You can’t be required to perform services as a condition for receiving the prize. You cannot claim the prize for yourself but instead must assign the prize to charity. If you assign away the prize, you don’t get a charitable donation deduction. All these tests must be met to avoid tax on the prize.
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Most states require you to pay taxes on gambling winnings. Of course, some states are friendlier than others when it comes to taxing your wins.
Certain places don’t charge any taxes when you win in gambling. You definitely want to consider betting in these states when you have the opportunity.
But what are the states that don’t tax gambling winnings? Of the states that do tax, which ones don’t charge you much?
This page discusses where you can gamble tax-free (minus federal taxes). It also covers what else you should know regarding taxes on real money gambling.
States That Don’t Tax Your Gambling Winnings
If you look at the gambling laws by state, nine states don’t collect taxes from your betting wins. That said, you’ll want to keep the following places in mind when planning your next gambling trip.
Alaska
The Last Frontier doesn’t offer many gambling opportunities on its frontier. Alaska only provides legal casino cruise ships, bingo, and pull tabs. At least you don’t need to pay state taxes when winning through any of these activities, though.
Delaware
With fewer than 974,000 residents, The First State isn’t overly large. Nevertheless, it does offer a thriving gaming industry that includes three racinos.
Florida
The Sunshine State boasts tribal casinos, poker rooms, and racetracks. Floridians also enjoy a 0% tax when winning at these gambling establishments.
Nevada
With over 440 casinos, Nevada’s gaming industry needs no introduction.
The Silver State won’t level state taxes on any of the big jackpots you win in Las Vegas, Reno, Laughlin, or elsewhere.
New Hampshire
The Granite State offers a few charity casinos and sportsbooks. You won’t need to pay taxes to New Hampshire when beating the bookies or casinos.
South Dakota
South Dakota may not have the largest population (885k). But it still offers 45 casinos and a bustling gaming destination in Deadwood.
Texas
The Lone Star State boasts one of the largest populations with 29 million residents. However, it doesn’t offer an abundance of gambling options compared to its big population. Texas features a few casinos (Class II only), horse tracks, and charity gaming venues.
Washington
The Evergreen State features a harsh stance on online gambling that includes felony charges. Nevertheless, it does offer some betting opportunities, including tribal casinos, poker rooms, and racetracks.
Wyoming
Wyoming is the smallest state in terms of population (579k). It still provides some gaming venues, though, including charity casinos, horse tracks, and poker rooms.
States With Low Tax Rates on Gambling Wins
Most states do tax you to some degree regarding winnings, and some states have a high gambling tax. However, the following ones don’t take much from you.
Arizona
The Grand Canyon State provides tribal casinos, horse tracks, and charity gaming. Arizona features a relatively low 4.54% tax rate on gambling wins.
Indiana
The Hoosier State features several casinos, multiple sportsbooks, and regulated online betting. Indiana taxes winnings at a 3.23% rate.
Michigan
Michigan offers 26 casinos, including three commercial venues in Detroit and 23 tribal establishments throughout the state.
It also features sports wagering and legal online gambling sites. The Wolverine State only charges a 4.25% tax rate on winnings.
North Dakota
Out of the states that tax winnings, North Dakota does it to the smallest degree at 2.90%. The Roughrider State provides tribal casinos, charity casinos, and lotteries.
Pennsylvania
Pennsylvania has become a mini-Las Vegas with 12 casinos along with poker rooms and sportsbooks. It only charges a 3.07% tax rate on gambling wins.
What If You Win in a State That Taxes Casino Winnings?
Only nine states let you off the hook regarding income tax on winnings. Odds are, you live in a state that taxes gambling profits.
That being said, take surrounding states and their taxes into consideration. Provided you live in/near a state with no, or low, gambling taxes, then you’re in good shape.
Federal Taxes Always Apply
Earlier, I covered nine states that don’t tax your wins in casinos, sportsbooks, poker rooms, etc. Even if you hail from one of these places, though, you still need to cover federal taxes.
Uncle Sam taxes your gambling winnings at 24%. This percentage is almost double the top rate in California (13.3%), which features the highest top-end gambling tax out of any state.
The federal government doesn’t expect you to only report jackpots or highly profitable years. It wants you to report every penny earned through gambling.
Of course, the IRS almost assuredly won’t hound you over a $10 winning Super Bowl bet against your friend. They will, however, care when you’re hitting jackpots and making serious profits.
A State Can Withhold Federal Taxes From Your Casino Wins
States are supposed to withhold federal taxes from large gambling payouts. Their casinos and sportsbooks will also issue a W-2G form if the win is big enough.
You need to fill this form out and give it to the gambling establishment. They’ll turn around and send it to the IRS before releasing your winnings.
Here are the guidelines on when bookmakers/casinos/poker rooms hand you a W-2G:
- $5,000+ payout in a poker tournament.
- $1,500+ payout in keno.
- $1,200+ payout through a slot or video poker machine.
- $600+ payout for a winning horse or sports bet (if win is 300x your stake).
Gambling Losses Are Deductible
As covered before, the IRS and state governments want you to report every dollar earned through gambling. However, you can deduct losses from winnings.
Everything that you wager and lose en route to winning counts as itemized deductions. These deductions reduce the amount of taxable income you’ll owe.
Here’s an example:
- You win $2,500 through a slot machine.
- You must report $2,500 under “other income.”
- You spend $1,700 to win this amount throughout the year (itemized deductions).
- $2,500 – $1,700 = $800 in reportable income.
You should record all of your gambling sessions for tax purposes. If the IRS ever comes calling for an audit, you’ll want evidence of your wins and losses.
The more information you possess, the better chance you stand of passing an audit with flying colors.
Can You Get Away Without Paying Gambling Taxes?
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For the sake of avoiding any legal headaches, you should report gambling income and pay taxes on it. Of course, you may still wonder if it’s possible to get away without covering gaming related taxes.
Three potential reasons why you might wonder this include:
- You don’t want to mess with $50, or so, of gambling winnings.
- You don’t have records of losses and think that it’s unfair to cover taxes on wins.
- You win big and want to avoid paying taxes.
In the first two cases, you may feel justified in not covering taxes. Dealing with winnings can be a major headache in these situations.
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In the third case, you likely know that failing to cover taxes on huge wins is wrong. But you may consider it anyways because you don’t feel like giving away a chunk of your payout.
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Again, state governments and the IRS want you to report everything. They leave it up to you to follow the laws in your respective jurisdiction.
I suggest that you keep records and go the honest route with gambling taxes. This way, you don’t need to sweat if you’re ever audited.
One situation when you definitely want to report wins is if you receive a W-2G form. Casinos and sportsbooks send W-2G’s to the IRS.
Therefore, the taxman will have documentation that you’ve earned a big prize. You don’t want to give them a reason to audit by not covering taxes on a large payout.
Conclusion
Hopefully, you live in or near a state that doesn’t require you to claim gambling winnings on your taxes. In this case, you can win big and only worry about paying the IRS.
Chances are, though, you live somewhere that imposes income tax on winnings. If so, you should consider if there are any nearby options that either don’t tax gambling wins or at least feature low rates.
Maybe this issue isn’t of the utmost importance to you—especially when you’re only playing for small stakes. But if you play for mid or higher stakes, then you can save yourself some money by playing where there’s no/little taxes taken from wins.