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The Washington Independent
All there is to know about gambling winnings and taxes in the USA

All there is to know about gambling winnings and taxes in the USA

Jun 17, 2021 10:11
finance
Amandeep Coleman

Table of Contents

Gambling income in the USA and the IRSWhen is a W-2G form requiredDeduction of gambling expenses

As opposed to some countries, the residents of which are not required to pay taxes on the winnings they have accumulated from gambling activities, this is not so in the USA where any money you earn is regarded as a taxable income.

Most researches show that around 66% of Americans engage in some form of gambling, and the share of people who take part in such activities keeps on growing because of the changing stances on gambling of some states. As a result, a number of regulations were set forth to guarantee that the winnings and losses from gambling activities will be properly overseen.

In order to make sure that they will not infringe the law unwittingly and ensure that they will not have problems down the line, gambling enthusiasts should understand how the winnings they have earned are taxed, and do so just read ahead.

Gambling income in the USA and the IRS

Whether you have just bought a scratchcard or you have traveled to one of the gambling hotspots where you have bagged a healthy prize does not make any difference for the government. Perhaps, the question you might be asking yourself at this point is what description of gambling income the International Revenue Service (IRS) has provided.

Founded back in 1862, the Internal Revenue Service(IRS) is the agency, which is tasked with the responsibility to administer laws and collect taxes on gambling winnings in the US.

It is important to point out that gambling income is a term, which is used to describe not only the winnings you have earned while playing casino games but also winnings amassed while playing bingo, game shows, lotteries, as well as when betting on racetracks. No matter what the case is, you will be required to painstakingly keep a record of your winnings. As for non-cash prizes, winners will be required to report them as well, but what they should be mindful of is that their monetary value will be taken into consideration.

What big winners might be happy to hear is that according to the regulations that are currently in place, gambling taxes are not progressive, which is not the case with income taxes. Formerly, the withholding tax rate was 25%, but as of 2020, it is set at 24%.

What is important to note, however, is that recreational and professional gamblers are treated differently, and if gambling is not your profession, you will be required to mark your winnings as other income and use Schedule 1. Gamblers who earn a living from such activities will be required to report them as self-employment income. They should be reported on Schedule C, and you will face a self-employment tax, state income tax, as well as federal income tax.

As for non-residents of the USA, they will be taxed a flat fee of 30% and will be required to report the winnings they have earned using Form 1040NR. Normally, non-residents of the USA are not permitted to deduct gambling losses, but this does not apply to gambling enthusiasts from Canada.

When is a W-2G form required

As for the reporting of your gambling winnings, you will be required to fill in a W-2G form which is the official document you will receive from the payee or the gaming operator. The establishment or the payee will be required to report the winnings you have come by, together with the tax withheld.

Players will be prompted to fill in this form in the event that they have wagered on slots or bingo, and their winnings exceed $1,200. As for keno, the winnings of players must be higher than $1,500. The operator will be required to provide you with such a form if you have taken part in a poker tournament, and your winnings are greater than $5,000. It is important to note that the buy-in and the stakes you have placed are reduced from that amount.

On the occasion that your winnings are worth $600 or more and this amount is 300 times larger than the wager you have made, and you have not played bingo, slots, keno, or taken part in a poker tournament, you will face a federal income tax of 24%. Please note that in the above-mentioned scenarios, a tax will no be withheld.

If the prize is won by two or more people, however, they will be required to fill in Form 5754.

Deduction of gambling expenses

While filling in the form, you will be allowed to deduct your losses, but it is essential to remember that this amount cannot be greater than your winnings. This also applies to the expenses for the bets you have placed, including the lottery tickets you have purchased and the amount you have put on a stake.

Under the Tax Cuts and Jobs Act, you are not permitted to remove the losses you have incurred from the winnings you have accumulated and report the remaining amount as winnings. What you need to do instead is fill in two separate forms, one for the winnings and another one for the losses.  Besides, under the provisions of the Tax Cuts and Jobs Act, your winnings cannot be greater than the losses you are trying to deduct.

In addition to this, the act points out that deducting other expenses, such as the cost of travelling, for example, is no longer allowed.

Amandeep Coleman | Amandeep had never known a moment when she wasn't reading or making up stories, having been born into a family of readers. She took out a pencil and notebook during the now-famous blizzard and started writing down one of those stories. It was there that I began my professional life. Her first book was written after several rejections and manuscripts. She is a member of many writers' organizations and has received several accolades from her peers and the publishing industry. The New Yorker recently dubbed her "America's favorite novelist".

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