Gambling and Taxes: Pay Them or Pay the Price

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Casino Winnings Tax

Casino Winnings TaxA wise man once said, “The income tax created more criminals than any other single act of government.” We here at the Crapspit say, “You wanna play, you gotta pay.” Taxes, that is. Yes, gambling winnings are taxable. Yes, you must report them on your Form 1040 which can be downloaded from here www.irs.gov/pub/irs-pdf/i1040tt.pdf. It doesn’t matter how much or how little your winnings are, you must report them. The Crapspit encourages you to obey the law, especially the tax law, so you don’t risk becoming one of those criminals to which that wise man referred.

DISCLAIMER: Neither the Crapspit nor any of its associates are tax lawyers, tax preparers, or certified accountants. The information provided in this article is for entertainment purposes only and should never be construed in any way as legal or proper guidance or advice regarding tax laws, tax reporting, and tax payment. If you need help with your taxes, consult a tax professional. Do not rely on or use the information in this article in preparing your tax return.

The last sentence in the disclaimer above is critical, and it applies not only to this article but also to any other information you find on other craps and gambling-related websites. Do not trust those types of websites to provide accurate information about taxes associated with gambling winnings. Many such websites provide incomplete information or information that’s flat-out wrong. For example, we found a website that states (paraphrased), “Regardless of the winning amount, Form W2-G is not required for winnings from table games such as craps, baccarat, pai gow, Blackjack, and roulette. This means you don’t need to fill out and submit a W2-G for winnings from these games.” That’s just not true. There are at least two things wrong with that information. Firstly, you (i.e., the winning bettor) don’t fill out the W-2G; the payer (i.e., the casino) does and they provide you a copy similar to the way your employer provides you a W-2. Secondly, according to the Internal Revenue Service’s Instructions for Form W-2G, the payer (casino) is, indeed, required to fill out and file a W-2G (found here www.irs.gov/pub/irs-pdf/fw2g.pdf) for your craps winnings if your winnings meet certain criteria, which we discuss later in this article. Table games are not specifically called out in the Internal Revenue Service instructions, but they are captured under the heading for Dog Racing, Horse Racing, Jai Alai, and Other Wagers not addressed later in the form. Observe the last part of that heading about “other wagers.” The IRS instructions to the payer (casino) under that heading state, “File Form W-2G for every person to whom you pay at least $600 in gambling winnings when their winnings are 300 times or more than the wager amount.”

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Another example of wrong information on gambling websites is that another site states the income tax at the Federal level on gambling winnings is a flat 25%. Wrong! The 25% figure is the “Regular Withholding” rate that the payer (casino) may withhold when they pay your winnings to you, depending on the type and amount of your winnings. On your tax return, gambling winnings are added to your job income to calculate your adjusted gross income. The 25% withheld from winnings you get from gambling (shown on your W-2G) are added to the taxes withheld from your job income (shown on your W-2) to calculate your total taxes paid. If, for example, your calculated gross adjusted income puts you in the 33% tax bracket and if the total income taxes you paid aren’t enough, then you have to pay more. In simple terms for this example, if you’re in the 33% tax bracket, then in effect you’ll pay 33% in taxes on your winnings you get from gambling, not just the 25% that the casino withheld. There’s a difference between a tax rate and a withholding rate, and the writer of that article on that other website apparently doesn’t get it.

filingtaxescasinosYou’d be amazed at the many idiotic statements made on many gambling-related websites that demonstrate either their lack of understanding of the tax requirements, or their laziness to read the tax requirements before writing articles for their websites. Incomplete, misleading, or wrong information about paying taxes can be dangerous for you. We here at the Crapspit hope you never make decisions about your tax return based on information you read on any craps or gambling-related website. Instead, we hope you consult a tax professional if you can’t figure out the tax code yourself. Having said that, let’s look at some of the highlights contained in pertinent IRS forms and on the IRS website.

Gambling income includes winnings from raffles, horse races, dog races, lotteries, and from casinos. Gambling income “from casinos” includes your craps winnings. As noted, it doesn’t matter how much or how little your winnings are, you must report them. So, whether your winnings from gambling for the year are $10, $100, or $1,000, report them.

The payer (casino) may file (i.e., send to the Internal Revenue Service and give you a copy) a Form W-2G if your winnings meet stated criteria. Form Number W-2G is titled, “Certain Gambling Winnings.” As you know, your employer gives you a Form W-2, Wage and Tax Statement, which reports your work earnings to the Internal Revenue Service. The W-2G (the “G” stands for “gambling”) is like the W-2 in that it reports your winnings from gambling to the Internal Revenue Service. Remember, the payer files a W-2G only if your winnings meet specified criteria, but that doesn’t mean you don’t have to report your winnings on your Form 1040. For example, suppose the only gambling bet you make this year is a $5 Hard 10 craps bet and you win $35. In this example, the casino does not have to file a W-2G, but you still must report your $35 winnings on your Form 1040.

The criteria for the casino to convey gambling winnings on Form Number W-2G are different depending on whether the winnings are from bingo, slot machines, keno, poker tournaments, or “other” wagers. The criterion applicable to craps winnings, as stated in the IRS Instructions for Form Number W-2G for “other” wagers, is: “If your winnings from gambling (except from keno, bingo, slot machines, and poker tournaments) if reduced, at the discretion of the payer, by the amount of the wager are $600 or greater, and at least 300 times the wager amount or your winnings from gambling are subject to withholding of income tax at the Federal level (i.e., either a backup withholding or a regular withholding).” Pay attention to the words “and” and “or.” It can get confusing quickly, so that’s why we suggest you consult a tax professional if you need help to fully and accurately understand the requirements.

In addition to filing a W-2G, the payer may be required to withhold income tax at the Federal level from payment to you. The IRS has two withholding types for gambling winnings: (1) Regular, and (2) Backup. The casino will apply a Regular withholding of 25% income tax at the Federal level if the net win (i.e., your winnings amount less the wager amount) is greater than $5,000 and are won from lotteries, sweepstakes, wagering pools, or “other” wagers when their winnings are 300 times or more than the wager amount. The casino will not apply a Regular withholding to winnings from slot machines, keno, or bingo. The casino may apply a Backup withholding of 28% for income taxes at the Federal level (including for slot machines, bingo, and keno) if you don’t provide the casino a proper taxpayer ID (identification) number (e.g., your social security number), and a 25% withholding has not been applied, and your winnings are $600 or more and 300 times or more your wager (or your winnings are $1,200 or more from slot machines or bingo, or $1,500 or more from keno, or $5,000 or more from a poker tournament). In other words, if you don’t want the casino to withhold an extra 3% from your payment for taxes, give them your correct social security number if they request it for tax purposes.

You must report money won at craps for the year on line 21 of Form 1040. Line 21 is “Other income, list type and amount.” You can’t use Form 1040EZ or Form 1040A to report gambling winnings. It doesn’t matter whether you received or didn’t receive a Form Number W-2G from the casino, you must report winnings from gambling on this line. Your gambling “winnings” include only your winnings; they don’t include your losses. For example, suppose this year you won $800 playing craps and lost $500 for a net gain of $300. Enter $800 on line 21 (i.e., do not enter the $300 net). You’re allowed to deduct your losses if you meet certain rules, but it’s done somewhere else, not on line 21 of Form 1040.

If you itemize deductions, you can deduct your year’s gambling losses on line 28 of Form 1040, Schedule A. Schedule A is “Itemized Deductions.” In the example above, this is where you enter your $500 gambling losses for the year. You can’t deduct gambling losses that are more than your winnings. For example, if for the year you won $1,000 and lost $1,200, you can deduct only $1,000 of your losses. This rule helps prevent “criminals” from claiming they won, for example, $5,000 and lost $500,000 in an attempt to help reduce their adjusted gross income to zero and, as a result, pay no income taxes.

IRSKeep records! It’s crucial to keep complete and accurate records of winnings and losses from gambling. Keep your loss records separate from your winnings records (i.e., don’t combine wins and losses to calculate a net). If you want to deduct any losses, you must be prepared to show proof if you get audited. The Internal Revenue Service suggests keeping the following types of records:

  • Dates you made the wager(s), and types of betting activities (e.g., poker, craps, slots, horse race, etc.).
  • Names and addresses of where you gambled.
  • Names of other people (if known) who were with you when you gambled.
  •  Amount won or lost during each activity.
  • Proof of your winnings and losses. The IRS suggests keeping all W-2G Forms you receive, betting tickets, canceled checks or other check-cashing records, ATM receipts, credit records, bank withdrawals, and statements of winnings or payment slips that you get from where you gambled.
  •  For slot machines, record the machine number and winnings or losses with dates and times.
  •  For table games (this includes craps), the IRS website recommends recording the table number where you played and whether the pit or cage issued you a credit.

When you finalize your Federal tax return, you may not be completely finished. Don’t forget State taxes. Some states happily tax gambling winnings, so be sure to check if your home state wants to grab their share of your winnings.

We can’t stress enough the importance of not relying on any craps or gambling-related website for tax advice. If you need help with your taxes, seek help from a tax professional. Good luck at the tables. We hope you pay a ton of gambling-related taxes because paying a lot of taxes means you’re winning a lot of money at the craps table!

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Author
Written by James Morgan Jr,  in partnership with the team of craps pros at crapspit.org. We asked him to write this post since he is best suited to cover the topic!