If you just won a jackpot, a prize or the lottery, congratulations!
Now here’s the bad news: Uncle Sam wants his cut and you must pay taxes on the winnings. However, you are allowed to write off any losses against those winnings.
The IRS has strict rules surrounding the taxability of gambling winnings. First of all, gambling income includes, but is not limited to, winnings from raffles, casinos, bingo, horse races and lotteries. It also includes the fair market value of any prizes you win such as cars, trips and jewelry. The winnings must be declared on your income tax return.
Many years ago, my niece won a brand new truck in a radio station giveaway. She was so excited – until she received the Form 1099 showing the fair market value of the truck as income. Still, she happily paid the taxes as they were certainly far below the value of what she received.
If you win enough money when gambling, you will receive a Form W2-G and your winnings may be subject to income tax withholding. Keep in mind that your gambling winnings must be declared whether you receive a Form W2G or not. Here are the winning thresholds that create the requirement for gambling establishments to issue a Form W2G:
- From slot machines and bingo games, $1,200 or more
- From keno, $1,500 or more
- From a poker tournament, $5,000 or more
- From other wagers and the payout is 300 times the amount of the wager, $600 or more
You must show the amount from Form W2-G or Form 1099 as other income on Line 21 of your income tax return. Do not subtract your gambling losses from this figure and report the difference—the IRS doesn’t allow this.
In order to deduct gambling losses, you must be able to itemize deductions. Gambling losses are subtracted under Other Miscellaneous Deductions on Schedule A, and you are allowed to deduct losses only to the extent of winnings. So if you won $10,000 but had losses of $15,000, you may only deduct $10,000 in losses.
Make sure you keep accurate records on your winnings, and if you do quite a bit of gambling, keep all the losing lotto and keno tickets and document your losses as much as possible. If gambling in a casino, become a member of their player’s club in order to track your gambling activity. Most player clubs provide a card that can be used at the slot machines and gaming tables to track your losses as well as your winnings.
The IRS recommends that you keep a gambling diary to help document your activity. The diary should include:
- The date and type of your specific wager or wagering activity.
- The name and address or location of the gambling establishment.
- The names of other persons present with you at the gambling establishment.
- The amount(s) you won or lost.
Picture yourself three years from now sitting before an auditor, and you you must prove your gambling losses to this auditor. In addition to a diary, you will want to keep cancelled checks, table and slot machine numbers, credit data from the casino – anything to back up the losses that you claim.
For more information on gambling income and losses, see IRS Publication 529