Playing a casino game or betting on a horse race should be fun, and that enjoyment increases if you actually win. The inevitable buzzkill to that situation for most people who enjoy such diversions in the United States, however, is gambling taxes.
Except for in a small set of circumstances, the IRS and the state in which you won while playing expect their cut of the value you now hold because of your luck. Here are a few key things to remember as you file your taxes for the 2021 tax year.
Four things to note in regard to US gambling taxes
This aspect of winning money and/or prizes doesn’t have to be as intimidating as it sounds. Actually, in many instances, your tax obligation is mostly or wholly taken care of before you receive your winnings. That applies whether you gamble in person or online.
That’s because many gambling outlets automatically withhold an adequate amount of your winnings if they meet the IRS’ qualifications. However, it isn’t wise to simply assume that’s the case. We have a detailed guide to gambling taxes. These outline the guidelines for US taxpayers’ obligations.
Additionally, many of our state-specific sister sites like PlayNewJersey have gambling tax primers relevant to those specific states. They are a great resource for more in-depth information local to your situation.
At the same time, some elements are the same no matter where you live in the US or where you got your gambling win. These are the universal guidelines you should observe regardless of your situation.
Winnings, not profit, is what the IRS cares about
When it comes to gambling winnings, the IRS doesn’t care whether you actually turned a profit. It’s interested in your winnings, whether you actually lost money claiming them or not.
Many gamblers make the mistake of thinking they only have to report any profit they made over the course of a year. That is far from the truth. If you have any qualifying winnings, you must report them as income.
For the tax year 2021, those thresholds are:
- $5,000 or more (cumulative throughout the entire tax year) from any sweepstakes or wagering pool, including payments made to winners of poker tournaments or lotteries
- Any other wager if the proceeds are at least 300 times the amount of the bet
If you don’t report the full amount of your qualifying winnings, you risk underreporting. That comes with interest and fines, which could supersede any amount you might think you are saving by underreporting.
If that seems unfair to have to report your winnings no matter the cost, there is a flip side to that situation. There is an IRS deduction for gambling losses, but there are some rules to note.
The basics of the IRS gambling loss deduction
You can opt to deduct your gambling losses as an expense on your IRS return. Most states with income taxes do not allow such deductions. One exception to that is Michigan, which recently changed its law to allow taxpayers to claim the same deduction as they do on their federal returns.
However, it’s important to remember these rules if you make this choice:
- Keep detailed records of all your gambling activity
- You cannot deduct more than you won while gambling during the year
- You must itemize your deductions using Schedule A, Form 1040
Furthermore, itemizing your deductions only makes sense if you have enough total eligible expenses to exceed your standard deduction. A lot of people gamble while they are traveling. If that was you in 2021 and you had some qualifying winnings, your situation warrants some additional thought.
Special considerations for gambling and traveling
If you win some money on a trip outside your state of legal residence, the casino, racetrack, sportsbook, etc., might withhold part of your winnings for taxes relevant to where it operates. That may or may not absolve your obligations to your state of residence.
Many states have reciprocal agreements with each other to honor taxes paid on money won while gambling. That isn’t a completely uniform situation, though. For example, Connecticut is one state in which residents cannot claim taxes paid to another state as a credit against their gambling income.
Additionally, the tax paid to the other state might 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 out-of-state gambling and present that to an accountant or tax law professional who can guide you in your individual situation. That goes for people who live in cities with local income taxes as well.
Across the US, many casinos and lotteries award non-cash prizes. As you might expect, the fact that your winnings aren’t in cash doesn’t mean they aren’t winnings.
What to do if you won an experience or item gambling
Boats, cars, and even trips can qualify as gambling winnings. The same qualification thresholds apply to them as apply to cash winnings. If their value is at least $5,000 or 300 times what you wagered to win them, they are reportable.
How do you know what to report? Actually, the entity that grants the prize to you should take care of that. They must supply you with a Form 1099 stating the value of your prize. When tax time comes, you will treat that like any other 1099.
Keeping all these things in mind, you are less likely to run into any problems while dealing with gambling taxes. If you have any further concerns, a local accountant or tax lawyer is your best bet.