Playing a casino game or betting on a horse race should be fun, and that fun increases if you actually win. The inevitable buzzkill of this situation for most people who enjoy such entertainment in the United States, however, is gambling taxes.
Except in a small set of circumstances, the IRS and the state in which you won while gambling expect a reduction in the value you now hold because of your luck. Here are some key things to remember when filing your tax returns for the Tax year 2021.
Four things to note about US gambling taxes
This aspect of winning cash and/or prizes doesn’t have to be as daunting as it sounds. In fact, in many cases, your tax liability is mostly or fully paid before you receive your winnings. This applies whether you play in person or online.
This is because many outlets automatically withhold an adequate amount from your winnings if they meet IRS criteria. However, it is not wise to simply assume that this is the case. We have a detailed guide to gambling taxes. These outline the guidelines for US taxpayer obligations.
Additionally, many of our state-specific sister sites, such as PlayNewJersey have relevant gambling tax primers for those specific states. They are a great resource for getting more detailed information about your situation.
At the same time, some elements are the same no matter where you live in the United States or where you got your gambling win. Here are the universal guidelines you must observe whatever your situation.
Earnings, not profit, is what the IRS cares about
When it comes to gambling winnings, the IRS doesn’t care if you actually made a profit. It is interested in your winnings, whether you actually lost money claiming them or not.
Many players make the mistake of thinking that they only have to declare the profits they have made over the course of a year. It is far from the truth. If you have qualifying winnings, you must report them as income.
For the 2021 tax year, these thresholds are:
- $5,000 or more (accumulated throughout the tax year) from any competition or betting pool, including payments made to winners of poker tournaments or lotteries
- Any other bet if the product is at least 300 times the bet amount
If you do not declare the total amount of your qualifying earnings, you under-reporting of risks. This comes with interest and fines, which could override any amount you think you’ll save by under-reporting.
If it seems unfair to have to report your winnings no matter the cost, there is a flip side to this. There is a IRS deduction for gambling lossesbut there are a few rules to follow.
The Basics of the IRS Gambling Loss Deduction
You can choose to deduct your gambling losses as an expense on your IRS return. Most states with income taxes do not allow such deductions. An exception to this is Michiganwhich recently changed its law to allow taxpayers to claim the same deduction as on their federal returns.
However, it is important to remember these rules if you make this choice:
- dungeon detailed records of all your gaming activities
- You cannot deduct more than you earned playing during the year
- You must itemize your deductions using Schedule a, Form 1040
Also, itemizing your deductions only makes sense if you have enough total eligible expenses to exceed your standard deduction. Many people gamble while traveling. If this was you in 2021 and you had qualifying earnings, your situation warrants further consideration.
Special Considerations for Gambling and Travel
If you win money while traveling outside your state of legal residence, the casino, racetrack, sports betting, etc., could withhold part of your earnings for applicable taxes where it operates. This may or may not exempt your obligations to your state of residence.
Many states have reciprocal agreements with each other to honor taxes paid on money won while gambling. It’s not a completely one-size-fits-all situation, however. For example, Connecticut is a state in which residents cannot claim taxes paid to another state as a credit against their gambling earnings.
Also, tax paid to the other state may not resolve your liability to your state of residence. This is because different states have different tax rates and schedules.
The best thing to do is to keep detailed records of your game out of state and present it to an accountant or tax law professional who can guide you in your personal situation. This also applies to people who live in cities with local income taxes.
In the United States, many casinos and lotteries award non-cash prizes. As you’d expect, just because your winnings aren’t cash doesn’t mean they aren’t winnings.
What to do if you have gained experience or a game item
Boats, cars and even travel can be considered gambling. The same qualification thresholds apply to them as those that apply to cash prizes. If their value is at least $5,000 or 300 times what you bet to win them, they must be declared.
How do I know what to report? In fact, the entity giving you the prize should take care of it. They should provide you with a Form 1099 indicating the value of your prize. At tax time, you will treat this like any other 1099.
By keeping all of these things in mind, you are less likely to run into problems when dealing with gambling taxes. If you have further concerns, a local accountant or tax lawyer is your best bet.