Taxes on Lottery & Gambling Winnings: What You Need to Know

Is Lottery & Gambling Income Taxable?

Winnings from lottery and gambling activity are fully taxable by the IRS and state governments and must be reported on your tax returns. Lottery and gambling winnings include cash and the fair market value of cars, trips, and merchandise gained from sports betting, racing, bingo, slot machines, games shows, poker, raffles, scratch-off cards, state lottery drawings, and games of chance. Winnings from foreign countries, as well as multi-national and international gambling are also taxable and must be included on you federal return.

Lottery and gambling winnings over $600 as well as the fair market value of items won like new appliances, trips, and cars should be reported to the IRS on Form W-2G, Certain Gambling Winnings – this form will be sent to you by the paying organization. You must report all lottery and gambling winnings as “Other Income” on Form 1040, Schedule 1 and attach to Form 1040, including winnings that are not reported on Form W-2G. If you are a nonresident alien of the U.S. use Form 1040NR Nonresident Alien Income Tax Return to report lottery and gambling winnings. 

How to Calculate Taxes on Lottery and Gambling Winnings or Losses

Gambling Winnings

The IRS generally withholds 24% of your winnings to cover Federal Income Tax. However, depending on the tax bracket you are in, this may not be enough to cover your tax bill. You can make estimated tax payments if you think you may owe more. Like the IRS, Individual states tax lottery and gambling winnings as income, so the amount you owe depends on where you live.

Gambling Losses

You can deduct gambling losses up to the amount of your winnings on Form 1040, Schedule A only if you itemize your deductions. You cannot claim gambling losses if you take the standard deduction. The IRS requires accurate records like receipts, tickets and other statements that clearly show your wins and losses in order to claim your losses. Generally, nonresident aliens of the United States who aren't residents of Canada can't deduct gambling losses.

FAQs

Lottery:

• Do you pay taxes on lottery winnings every year?

If you took your lottery winnings as a lump sum payment you will pay taxes on your winnings only in the year in which those winnings were received. If you took your lottery winnings as annual payments you will pay taxes on the amount of the lottery winnings each year at the rate applicable for your new income bracket. 

• Are lottery tickets tax deductible?

Yes. IRS rules for gambling losses apply to lottery tickets. The cost of those tickets can be taken as an itemized deduction to offset any kind of gambling winnings --lotteries, horse racing, cards, et cetera. But if there are no winnings, there is no deduction. 

• Do seniors pay taxes on lottery winnings?

Everyone is required to report gambling winnings over a certain amount. In many instances casinos will take your information and issue a Form W-2G. Whether or not seniors pay taxes on their winnings is determined by their taxable income. When income is below the standard deduction amount seniors, like other taxpayers, do not have to pay taxes. 

• Which states tax lottery winnings?

All except the following ten states along with Puerto Rico and the U.S. Virgin Islands do not tax lottery winnings: California, Delaware, Florida, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington and Wyoming. 

• What happens if I win the lottery in another state?

As a general rule, if you live in one state and win a lottery in another, you are first taxed by the state where you bought the lottery ticket. Then your winnings are taxed by the state you live in. You can claim a credit for the taxes paid to the state you bought the ticket in and when your home state has the same or a lower tax rate than the other state, you won't have to pay taxes in your state. 

Gambling:

• How much money can you win gambling without paying taxes?

One dollar ($1). All winnings are taxable. However, you will receive a W-2G when you win the following amounts: $600 or more at a horse track (if that is 300 times your bet); $1,200 or more at a slot machine or bingo game; $1,500 or more in keno winnings. 

• Do you pay social security tax on gambling winnings

No. Social Security and Medicare taxes are only assessed on earned income. Lottery and gambling winnings are not considered earned income. 

• Do foreigners pay taxes on gambling winnings?

The IRS requires U.S. nonresidents to report gambling winnings on Form 1040NR. Such income is generally taxed at a flat rate of 30%. Nonresident aliens generally cannot deduct gambling losses. There is a tax treaty between the United States and Canada. 

• Do you have to report casino winnings to the IRS?

Gambling winnings are fully taxable and you must report the income on your tax return, even if you don’t get a Form W-2G. Gambling income includes but is not limited to winnings from lotteries, raffles, horse races, and casinos. 

• What happens if I don’t report my gambling winnings?

The IRS compares income reported to them and to states with the income reported on a tax return. If you don’t report your winnings, you can be assessed penalties and interest as well as any taxes due.