What happens in Vegas might stay in Vegas, but if it involves earnings, it’s possible the Internal Revenue Service (IRS) is going to catch wind of it. And with the prevalence of online gambling, more and more taxpayers have gambling winnings and losses that they may not be properly reporting.
You can help your gambling clients to understand the rules for reporting winnings and losses—and, importantly, to maintain adequate records—so they avoid a future tax mess, says taxation expert Robert E. McKenzie. In his webinar for Eli Financial, “Gambling and Taxes: The Price of Winning,” McKenzie explains the distinct rules for reporting gambling winnings and losses.
‘Casino Taxes’: Pay on Winnings, Deduct Losses
Many taxpayers will be surprised to learn that even casual gamblers must report winnings—and can report losses—on their tax returns. The IRS clearly spells out reporting rules for gambling. And, yes, gambling winnings are full taxable.
Income definition: “Gambling income includes but isn’t limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips,” notes the IRS.
Here’s a primer on what the IRS expects:
- Gambling winnings subject to federal income tax withholding should be accompanied by Form W-2G. The form looks similar to a standard wage earnings form.
- All gambling winnings should also be reported on gambling winnings under “Other Income” (line 21) on Form 1040.
- Some winners may have to pay an estimated tax on the additional casino tax income.
- Gambling losses may be itemized as deductions on Form 1040, Schedule A. The amount of losses a taxpayer deducts can’t be more than the amount of gambling income reported on the return.
- Important: Be sure your clients know that to deduct losses, they must keep an accurate record of gambling winnings and losses and be able to provide receipts, tickets, statements, or other records.
- Nonresident aliens who have to report gambling winnings should use Form 1040NR.
Sports Betting: Auto Withholdings May Be New Reality for Big Winners
The biggest news in gambling this year, thanks to a Supreme Court ruling, is that states can legalize sports betting. Previously, such gambling was legal in Nevada only.
“Generally speaking, if you win above $5,000 from gambling, you can expect the payer (i.e., casino) to withhold 24 percent for taxes,” reports CNBC. “Depending on your other income, that rate might not be enough to cover taxes owed on the winnings.”
As with other tax issues, however, it’s unclear how many taxpayers will take advantage of any itemized deductions to claim losses.
“Because the standard deduction nearly doubled for all taxpayers and most deductions were eliminated, fewer taxpayers are expected to have enough deductions to make itemizing worth it,” CNBC adds.
Income definition: Reportable sports betting income, says Kiplinger, includes winnings in casinos, fantasy football leagues, and even office pools.
New Deducted Expenses Rules for Pro Gamblers
There are also new rules for professional gamblers, says CNBC: Pro players who deduct expenses (such as traveling to and from the casino) must add them to their gambling losses when calculating the value of the deduction as opposed to writing them off separately as a business expense.
This law went into effect in 2018 and is scheduled to remain valid through 2025.
There are plenty of rules to be aware of when serving clients who are gamblers—both professional and casual, says McKenzie, host of “Gambling and Taxes: The Price of Winning.” In his webinar, he reviews the most recent cases and rulings, both “for” and “against” taxpayers. He also explains how to effectively defend an IRS gambling examination.
