7 Things You Need to Know about Gambling and Your US Individual Income Tax Return
Published on February 20, 2018
If you’re like most people, you dread tax season each year. There’s nothing like the anxiety of wondering if you’re going to owe the IRS. Add to that the stress of figuring out what information you’ll need to include and whether it’s coming by mail or electronic delivery, then scheduling time to meet with your tax advisor. Not to mention the added fear of wondering if you’re going to miss something that will result in penalties and interest, or, even worse, an audit.
All of this can combine to create a real headache. Read on to learn some of the basics regarding your gambling winnings and losses and how they affect your individual income tax return. Even possessing some general knowledge on the issue can go a long way to reduce stress. Keep in mind that this material is provided for general awareness. For tax planning and advice and more detailed information, check out the links provided throughout this post.
It’s also important to note that the information provided here is for casual gamblers only. Professional gamblers will file Schedule C to report winnings and losses from gambling, and that is outside the scope of this discussion. Most gamblers will have a hard time classifying themselves as professionals, and there may be some reasons why it would not be considered advantageous to do so.
Without any further delay, let’s take a look at 7 things you should know about gambling and your US individual income tax return.
One of the first things to recognize about your tax return is that it’s ultimately your responsibility to determine that it is complete and accurate. You may take your tax information to a professional advisor who will do most of the legwork for you, but are you getting all the deductions you deserve? Is all your information being reported, and being reported correctly? At the end of the day, you’re signing the bottom line of your tax return, certifying to the IRS that the information reported is complete and accurate.
Regardless of whether you prefer to complete and submit your own tax return or seek professional help, you need to be aware of each line on the return. Reporting your gambling winnings and losses are no exception.
You benefit from ensuring that your return is correct, as you can ensure you receive the largest refund that you deserve and that you don’t have to deal with any correspondence from the IRS in the future.
It’s also your responsibility to track and record all your wins and losses. If you have gambling winnings from an online or land-based casino or sportsbook, it’s your responsibility to keep track of that income and make sure it is handled correctly on your US income tax return.
I recommend starting a log – it can be as simple as creating a chart on a piece of notebook paper, keeping a note in your phone, or creating a basic table in Excel – to keep track of your gambling winnings and associated losses. Record the date, type of wager, amount wagered, amount won, and the establishment you gambled with. In addition to your own running record of each wager, keep any receipts or tickets provided to you by the gambling establishment.
Any gambler who wants to practice solid bankroll management and experience long-term success should be keeping records anyway. Now you know that there is an added benefit of record keeping; if you’re not already doing this, start now!
Your gambling winnings are reported as taxable income on line 21 of your US individual income tax return (Form 1040). If you have any amount of gambling winnings, you won’t be eligible to file Form 1040EZ or Form 1040A.
It doesn’t matter how large or small the payout, or if you receive any type of record from the establishment you gamble with; if you have income from gambling, it is reportable and taxable.
Keep this in mind for tax planning purposes as well. While small amounts of gambling winnings likely won’t impact your refund or balance due significantly, larger winnings can. If you receive a large payout from a casino or sportsbook, consider whether you should have some federal income tax withheld on it proactively, to avoid owing a large portion to the IRS when you file your tax return.
Similarly, you can make estimated payments to the IRS throughout the year to avoid having a large balance due when you file your return. This is important because, depending on the amount you owe on the bottom line of your tax return, you may incur an underpayment penalty in addition to the taxes owed.
Now that you know that your winnings are reportable and taxable, when it comes to tax season, make sure all of your winnings are reported on your return as income. And keep your tax return in mind if at any time during the year you receive a sizable payout.
IRS Publication 525, page 31 sheds a bit more light on taxable gambling income.
One thing that may surprise you to learn about your income tax return is that, not only are your monetary winnings taxable, your comps are too. If you receive any of these types of benefits from an online or land-based casino or sportsbook, keep in mind that you may owe income tax on them.
Comps, such as meals, hotel rooms, airline vouchers, cars, trips, and other similar items are taxed at their fair market value. It’s interesting to note that it doesn’t matter whether you actually take advantage of the comps provided to you. For example, if you win or are given airline vouchers and you don’t use them, you still have to pay tax on the fair market value of the vouchers.
Paying tax on your winnings from the casino or sportsbook, whether it’s online or land-based, may be disappointing, but did you know that you may actually be eligible to offset some of your tax due by claiming your gambling losses as an itemized deduction on Schedule A? Fortunately, this deduction is not subject to the 2% of adjusted gross income (AGI) limitation as many other miscellaneous deductions are.
It’s important to note, however, that you can only claim losses up to the amount you report as gambling income.
So, if you had a bad year at the casino or sportsbook, you may be looking to offset some of your wage income by claiming those sizable gambling losses. Unfortunately, that’s not an option, but you may be able to offset the tax due on your associated gambling income.
Another important thing to be aware of is that it is only valuable to you to itemize deductions if your total itemized deductions exceed your standard deduction. Your standard deduction is based on your filing status, and the amount of the standard deduction can change significantly from year to year.
As an example, under the Tax Cuts and Jobs Act of 2017, the standard deduction for most taxpayers will nearly double for tax year 2018. This means that it will be much less likely for most taxpayers to see a benefit from itemizing deductions.
For more information on claiming gambling losses, check out IRS Publication 529, pages 11-13.
When you experience sizable winnings in one occasion, you will receive what is called Form W-2G. This information will be furnished to the IRS, and you can expect a letter if you neglect to claim this on your tax return. The good news is that this form has all the information you need already recorded on it!
Depending on the amount won and the type of wager, you may or may not receive this form. Additionally, some casinos may print out this form on something that looks more like a receipt than an official IRS form as shown below. It doesn’t matter what the form looks like. If you receive a Form W-2G, you need to make sure you report it on your income tax return.
Also, as addressed previously, whether or not you receive any kind of form verifying your gambling winnings, they are still reportable and taxable. Not all winnings warrant receiving this form; just because you didn’t receive any official tax form reporting your winnings doesn’t mean they’re not taxable.
More in-depth details regarding Form W2-G, including help determining if you should expect to receive one, can be found by reading through these instructions.
Each state will handle gambling winnings differently. If you live in a state that assesses individual income tax, be sure to check ahead of time to know what effect your gambling winnings and losses will have on your state return.
There is too much varying information to get into any specific details here, but it’s vital to be aware that your state may assess an additional tax on gambling winnings or may have favorable rules for handling gambling losses. Do your research to ensure you know what to expect.
This link from the IRS website will provide you with a list of the states. To get to each state’s website through this list, just click the state you are interested in finding out more about, and then click on the “Taxation” link under your chosen state. From there, you’ll have to navigate the state’s website to find more specific information pertaining to gambling. I recommend simply typing “gambling” into the search bar on the state’s website to pull up any pertinent information.
So, maybe you’ve learned something new here and you’re pretty confident you missed something in prior years. Don’t worry. You have an opportunity to fix it.
The IRS will accept amended returns claiming a refund for 3 years from the original due date of the return. For example, the due date for 2016 individual income tax returns was April 18, 2017. This means that you can amend a 2016 tax return to claim a refund until April 18, 2020. If you owe the IRS, they may go back many more years to collect the taxes owed.
Maybe you’ve already filed this year’s return and realize you missed something. Don’t sweat it! If you’re expecting a refund, wait until you receive it. Once you’ve received your refund, you’ll need to file the Form 1040X, or amended US individual income tax return. When you file your amendment, be sure to send in any additional amount due, if applicable.
If you receive a letter from the IRS or a state government, you may need to provide more documentation for amounts claimed as income or losses, or you may need to amend a return to claim appropriate income or losses.
Want to learn more about filing an amended US individual income tax return?
Don’t be caught unprepared when it comes to filing your tax return this year and in years to come. Keep records and receipts throughout the year to verify amounts claimed as income or losses. Do your own due diligence and research to ensure that all amounts, whether in the form of monetary winnings or the fair market value of prizes, are being reported correctly on your income tax return. When you win significant amounts, consider whether you need to have any additional federal withholding throughout the year or make any estimated tax payments.
Always keep up to date with the ever-changing tax laws, especially the Tax Cuts and Jobs Act as it pertains to gambling winnings and losses. Research various state laws and handling of gambling income and losses and be prepared for what those rules may mean for your bottom line.
And if you feel you may have missed or mishandled something in the past, don’t panic. Simply file an amended tax return and pay any additional tax due, or claim any additional refund owed to you.
Tax season can create a lot of stress for taxpayers, but with a little advanced knowledge and research, you can be prepared for anything that may come your way, and you can continue to enjoy and celebrate those winning wagers, worry-free.