Know the final tax score of winning

The COVID-19 pandemic has kept more of us indoors, and it’s led to a surge in online gambling and sports betting.

As online betting gains popularity and joins traditional options like casinos and lotteries, there’s no shortage of ways to try your luck. If you’re lucky enough to win – whether at a casino or on your laptop – remember that tax consequences go hand in hand with your newfound fortune.

Review the tax rules

Whether you win online, at a casino, a bingo hall, or a fantasy sports event, you must report 100% of your winnings as taxable income. They’re reported on the “other income” line of the 1040 tax form. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the racetrack turns into a $110 win, you’ve won $80, not $110.

You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are deductible only up to the amount of gambling winnings. You can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.

Maintain good records of your losses during the year. Keep a diary to indicate the date, place, amount, and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.

Hitting a lottery jackpot

The odds of winning the lottery are slim, but if you don’t follow the tax rules after winning, the chances of hearing from the IRS are higher.

Lottery winnings are also taxable, including cash prizes and the fair market value of any non-cash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. You may also be subject to state income tax.

Report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. If you take cash winnings in annual installments, only report each year’s installment as income for that year.

If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. The payer also sends that information to the IRS. If state tax withholding is withheld, that amount may also be shown on Form W-2G.

Since the federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you could be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.

Talk taxes with us

If you’re fortunate enough to win a sizable amount of money, there are other issues to consider, including estate planning. Different rules also apply to people who qualify as professional gamblers. Contact the KraftCPAs tax services team to learn how to minimize your taxes and stay in compliance with legal requirements.

© 2021 Kraft CPAs PLLC

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