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There is a pantheon of great buzzkills in life. Discovering that a sale you thought you were taking advantage of has ended or buying tickets to an event only to have the website crash right as you’re attempting to check out can be among them. Also on that list are gambling taxes.
As much of a downer as it can be, avoiding the situation can turn a slight pain into a massive headache. A new survey shows that while many United States taxpayers are aware that their winnings are taxable, they are not sure exactly how to go about dealing with that situation.
Gambling taxes literacy could be quite low in the US
According to a Monday press release, tax service Jackson Hewitt says its polling shows a good degree of uncertainty among respondents in regard to what to do with their gambling winnings and their income tax filings.
Jackson Hewitt says the survey included responses from 1,000 US residents from March 3 through March 6 of this year. Additionally, the firm that completed the poll claims it took efforts to ensure the survey represents a cross-sampling of the US population in terms of age, ethnicity, gender, geography, and income.
According to the results, 62% of respondents said they “are unclear on how to report money won from” gambling. Furthermore, about 48% of the people who participated were under the impression that if online gambling was illegal in their state, they don’t have to report their winnings from playing on unregulated websites.
That’s just one example of confusion or misconceptions that US taxpayers often face when dealing with income tax filings and gambling. Here are a few others and the truth about them.
Gambling taxes; myth and reality
When it comes to reporting winnings from US online gambling or playing at physical casinos, correctly reporting your winnings can actually be quite simple once you understand a few basic concepts. By the same token, confusion over the same matters can lead to some problems. Here’s what you need to know ahead of Tax Day 2023 (April 18).
All gambling winnings are taxable income
If you won while gambling, you are obligated to report everything you won on your federal income taxes for the year. The IRS, and your state or municipality if they assess taxes on your income, consider gambling winnings taxable income. Some common pieces of misinformation that gamblers can fall victim to are:
- You only have to report any actual profit you made while gambling
- If you gambled on an unregulated website or with a bookie, you don’t have to report those winnings
- You only have to report your winnings that are at or above the IRS reporting thresholds
- It’s permissible to deduct expenses like buy-ins, hotel stays, and meals that you incurred while gambling from your winnings
- If you won a non-cash experience or item, you don’t have to report that
None of the above statements are true. It’s on you as the taxpayer to accurately report and then perhaps pay any amount you might owe on your winnings. Failing to do so could result in an audit, then being assessed fines and interest in addition to paying the amount owed.
With those things in mind, reporting your gambling activity can be quite simple. It’s just a matter of knowing how to complete the requisite forms.
IRS reporting procedures
The simplest way to look at reporting your gambling winnings is to not think of them as gambling winnings. Instead, just perceive them as another source of income you had for the year. That’s exactly how the Internal Revenue Service sees them.
For that reason, the total of your gambling winnings for the year goes on Form 1040, Schedule 1, Line 8b. To complete the process, follow the instructions for transferring the information from your Schedule 1 into your actual Form 1040. If the gambling company or casino withheld any of your winnings for tax purposes, you would report that on Line 25c of your Form 1040 to ensure you get credit for that amount.
A few things to remember:
- You need to report your cumulative winnings throughout the year
- If you had some of your winnings withheld, that does not guarantee you won’t still owe additional tax
- Even if the gambling entity sent a Form W-2G to you and the IRS, you still need to report those winnings on your tax returns
For any local and/or state reporting procedures, your best bet is to visit the website of the respective tax collection agency or consult a local tax professional. The information available there can be especially helpful in other circumstances related to gambling taxes.
Losses can be deductible but not always practical
The IRS and a small number of states do allow taxpayers to deduct their gambling losses from their income. However, to try to take advantage of that stipulation, you must forfeit the standard deduction for your income level and opt to itemize your deductions instead.
That brings up another important point when considering this option. Itemizing your deductions only makes sense if the total amount of your allowable deductions exceeds the standard deduction for your income level. If that isn’t the case, you could be actually cheating yourself out of part of a potential refund by not taking the standard deduction instead.
Jackson Hewitt included some tips in its report on its study if you choose to go this route. That includes keeping detailed records of your gambling activity. In addition, consulting a tax professional in your area can give you confidence that you have completed forms correctly.
There’s no reason to feel ashamed if you’ve felt confused about gambling taxes in the past. The American Economic Association says that overall tax literacy for the general public is quite low. By observing these simple concepts, you can join the hopefully growing number of people who don’t feel bewildered.
