Gambling has always been a popular form of entertainment for people all around the world. From the bright lights of Las Vegas to online casinos, people are drawn to the thrill and possibility of winning big. However, what many fail to realize is that gambling winnings are subject to taxes.

In most countries, including the United States, any form of income is taxable, and gambling winnings are no exception. This may come as a surprise to some, especially to those who have just hit a jackpot at the casino or won a big sum in a poker tournament. But understanding the ins and outs of gambling winnings tax is essential to avoid any potential legal or financial issues in the future.

In this comprehensive guide, we will delve into the world of gambling winnings tax and everything you need to know about it. We will cover topics such as the different types of taxes on gambling winnings, how they are calculated, and even tips on how to minimize your tax liability. So let’s get started!

Types of Taxes on Gambling Winnings

When it comes to taxes on gambling winnings, there are several types that you need to be aware of. These include federal income tax, state income tax, and self-employment tax (if applicable). Let’s take a closer look at each one.

Federal Income Tax

The Internal Revenue Service (IRS) views gambling winnings as taxable income, just like any other form of earnings. This means that any income you receive from gambling must be reported on your federal income tax return.

The federal income tax rate varies depending on your total taxable income and filing status. For the 2020 tax year, the tax rates range from 10% to 37%. If you’re a casual gambler, your winnings will be added to your regular income when determining your federal tax liability. However, if you are a professional gambler, your winnings will be considered as self-employment income and subject to a different tax rate.

State Income Tax

In addition to federal taxes, some states also impose an income tax on gambling winnings. The states that do not have income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. If you live in any other state, you may be required to pay state income tax on your gambling winnings.

The state income tax rates vary by state, with the highest being California at 13.3% and the lowest being North Dakota at 2.9%. It’s important to note that even if your state does not have an income tax, you may still be required to pay state taxes if you win money in a different state that does have an income tax.

Self-Employment Tax

If you are a professional gambler who makes a living off of gambling, you are considered self-employed by the IRS. As a result, your gambling winnings will be treated as self-employment income and subject to a self-employment tax of 15.3%.

This means that you will be responsible for both the employer and employee contributions to Social Security and Medicare taxes. However, if you are a casual gambler, this tax will not apply to you.

Calculating Taxes on Gambling Winnings

Now that we know the different types of taxes on gambling winnings, let’s take a look at how these taxes are calculated. The amount of tax you owe on your gambling winnings depends on several factors, including the type of gambling activity, the amount of your winnings, and your overall tax liability.

Types of Gambling Activities

There are various forms of gambling activities, and each one has its own set of rules for taxation. Let’s examine the most common types of gambling activities and how they are taxed.

Casino Games

When you win money from playing casino games such as slots, blackjack, or roulette, the casino will typically withhold 24% of your winnings for federal taxes. This is known as backup withholding and is required by law for any gambling activity that has a payout of $5,000 or more.

If you are a casual gambler and your winnings do not exceed $5,000, you can still request the casino to withhold the 24% for federal taxes. This may be beneficial if you anticipate owing taxes at the end of the year or want to avoid any surprises when filing your tax return.

Lotteries

The tax rules for lotteries vary by state. In most states, lottery winnings are subject to both federal and state income tax. However, some states have different tax rates based on the amount won and the type of lottery game played.

For example, in New York, all lottery winnings over $5,000 are subject to a 8.82% state tax rate. In contrast, lottery winnings in California are exempt from state income tax but are subject to federal income tax.

Poker Tournaments

Professionals who earn their living from playing poker tournaments must pay self-employment tax on their winnings. If you are an amateur player who only participates in occasional poker tournaments, your winnings will most likely be subject to regular income tax.

However, if you are an amateur player who wins a large sum in a poker tournament, you may be considered a professional and thus subject to self-employment tax. The IRS will consider factors such as the frequency of your play, your level of skill, and whether or not you promote yourself as a professional poker player.

Daily Fantasy Sports (DFS)

Daily Fantasy Sports (DFS) is a relatively new form of online gambling where players create virtual teams with real-life athletes and compete against each other for cash prizes. While DFS is considered a game of skill rather than chance, it is still subject to federal and state income tax.

DFS companies are required to issue a 1099-MISC form to any player who wins over $600 in a calendar year. This form will report the winnings to the IRS and can be used when filing your taxes.

Winnings Amount

The amount of taxes you owe on your gambling winnings also depends on how much you win. For larger winnings, the casino or gambling establishment will typically withhold 24% of your winnings for federal taxes. However, this is not the final amount of taxes you’ll owe.

When it comes to federal income tax, you are taxed based on your total taxable income, not just your gambling winnings. So if you have other sources of income, your gambling winnings will be added to that and could potentially push you into a higher tax bracket, resulting in a higher tax liability.

Overall Tax Liability

Your overall tax liability is determined by your total taxable income, filing status, and deductions. If your gambling winnings increase your total taxable income, you may end up owing more taxes at the end of the year. On the other hand, if your gambling losses exceed your winnings, you may be able to deduct those losses from your total taxable income, thus reducing your overall tax liability.

Tips to Minimize Your Gambling Winnings Tax Liability

Now that we have covered the basics of gambling winnings tax, let’s look at some tips you can use to minimize your tax liability.

1. Keep Track of Your Winnings and Losses – It’s important to keep a record of all your gambling activities, including wins and losses. This will come in handy when filing your taxes and claiming losses as deductions.

2. Deduct Your Losses – As mentioned earlier, if your gambling losses exceed your winnings, you may be able to deduct those losses from your total taxable income. Keep a record of all losing bets, tickets, and receipts to support your claim.

3. Know the Tax Rules in Different States – If you gamble in different states, it’s crucial to understand the tax rules of each state. Some states may have lower tax rates or higher exemptions, which could save you money in taxes.

4. Itemize Your Deductions – As a casual gambler, you may be able to deduct your gambling losses as itemized deductions. This means that you’ll have to give up your standard deduction, but if your gambling losses are significant, it may be worth it.

5. Keep Good Records – We can’t stress this enough; keeping good records is key to minimizing your tax liability. Good records will not only help you claim deductions, but they will also serve as proof in case of an IRS audit.

Conclusion

In conclusion, understanding the ins and outs of gambling winnings tax is essential for any gambler, whether casual or professional. Knowing the different types of taxes on gambling winnings, how they are calculated, and tips on minimizing your tax liability can save you a lot of headaches when it comes to tax season.

Remember to keep good records of all your gambling activities, including wins and losses, and consult with a tax professional if you have any questions. By staying informed and organized, you can ensure that your gambling experience remains fun and exciting without any financial surprises. Happy gambling!