Lottery winners look happy and a bit dazed when they appear in the news, holding a big cardboard check scrawled with their winnings. Many say they can’t believe their good fortune. After all, they just received one of the biggest payouts of their lives. Then, they get the actual check –24% is withheld to cover federal taxes and it often isn’t enough.
We all fantasize about what we would do with such luck - quit our job, build a dream home, travel. The fun of playing the odds, along with ballooning jackpots, entice many people to gamble their hard-earned money for the promise of quick riches. Winning is great, just remember to pay your taxes.
What types of winnings are taxable?
Large or small, all winnings from lotteries, sports, racing, bingo, cards, slot machines, game shows and more must be reported to the IRS and state governments. All winnings from the US and foreign countries, as well as multi-national and international gambling are taxable. So, if you win big at a card game in the Caribbean or a casino in Europe, you still have to pay.
How do I report my winnings?
You should report the gross amounts you received. If your winnings are high enough they will be reported on a W-2G. Different types of winnings have different minimum amounts for issuing a W-2G, but the minimum amount you have to report is $1.00, even if you don’t have a W-2G.
Keep in mind, the 24% withheld for the IRS may not fully cover the taxes owed on your winnings. Tax payments are based on the tax rate you end up in. The highest federal tax rate is 37%, so you could owe at the end of the year. To avoid this, you can send an estimated tax payment to the IRS when you receive your check. Don’t forget state taxes. Most states tax gambling winnings as income.
Any deductions allowed?
Losing is part of the risk, but you cannot net out your winnings with your losses. You also cannot deduct the expenses you incur to gamble like:
However, you can deduct all losses up to winnings on your return. The losses are a miscellaneous itemized deduction, not the miscellaneous deductions that have been suspended under tax reform, but part of the miscellaneous deductions still allowed. Keep in mind, the standard deduction amount is very high and most people don’t qualify.
Gambling is one of the oldest forms of entertainment. The price to play can be as low or high as you can stand. But whether you’re playing poker at a friend’s place or betting on the horses at Churchill Down’s, don’t forget Uncle Sam when you win.