If you’re a frequent gambler, you may have wondered how much of your winnings are taxable. As the rules surrounding gambling earnings can be complicated, it’s important to understand the tax laws surrounding these wins to avoid potential penalties or fines. In this article, we’ll discuss the current tax laws on gambling winnings, the types of gambling winnings that are taxable, and share some legal techniques to avoid or reduce gambling taxes.
Understanding Gambling and Tax Laws
Before jumping into the details of taxes associated with gambling winnings, it’s crucial to have a basic understanding of the tax laws associated with these earnings. The IRS has specific tax laws regarding gambling winnings, and below, are some things taxpayers need to know.
According to the IRS, gambling winnings include income resulting from wagers made on tournaments, casino games, slot machines, and other types of gambling-related activities. The current threshold for reporting gambling winnings is $600 or more for individual earnings and $1,200 or more for bingo and slot machine winnings.
When it comes to the taxation of gambling earnings, they’re subject to the federal income tax. Depending on the exact amount of taxable earnings, gamblers’ tax brackets can vary. Suppose the win is large enough to push the gambler into a higher tax bracket. In that case, the gambler’s earnings will be taxed at that higher bracket, depending on the amount of earnings.
Types of Gambling Winnings that are Taxable
Several types of gambling winnings are taxable, and the following are among them:
- Casino games (blackjack, craps, roulette, baccarat, etc.)
- Slot machines
- Horse racing
- Dog racing, etc.
Each of these gaming options is subject to its specific tax, calculated based on the total winnings.
Breakdown of Gambling Winnings and Taxes
The following is a breakdown of gambling winnings and taxes:
- Lotteries: Lottery earnings over $600 are taxed at the federal level. Your exact federal tax rate could be as high as 37 percent, depending on the amount won.
- Casino games/slot machines: Any earnings over $600 are subject to the federal income tax.
- Horse and Dog Racing: Winning at either of these activities is subject to the federal income tax, with both providing a form of documentation detailing how much the gambler won.
It’s essential to note that taxpayers can substantially lower the amount of taxes to be paid on their gambling winnings by keeping accurate records of both their winnings and losses.
Some gamblers have successfully avoided taxes on their winnings while others haven’t. Below are two anecdotal examples:
- Ed Salter, a professional gambler, won nearly $1.3 million across 126 gaming sessions in 2007, which he failed to declare on his tax return. He was caught, and the IRS forced him to pay taxes on the full sum. Had he declared the winnings, Salter would’ve saved a significant amount.
- On the other hand, In 2019, a slots player from Florida won $1.3 million at an Ohio casino. Because the winnings were under $1,200 at the slot machines, he didn’t need to pay taxes.
The above examples show the importance of having a thorough understanding of the tax laws surrounding gambling winnings to avoid any potential legal battles in the future.
Tax Laws Regarding Online Gambling Winnings
Many people assume that online gambling winnings are tax-free. Unfortunately, this isn’t true. Online gambling earnings are taxable, and tax laws regarding these gambling wins may vary depending on the online platform’s specific location. For instance, if online gambling is legal in the jurisdiction in which the casino is located, the earnings will be taxed. The same pertains to winnings from online poker, slots, and other gaming options played online.
Legal Techniques to Avoid or Reduce Gambling Taxes
Below are some legal techniques to avoid or reduce taxes on gambling winnings:
- Keeping accurate records of all gambling-related activities, including losses.
- Gambling-related losses serve as a tax deduction and help offset taxes on gambling winnings.
- Report gambling winnings on their tax return. Even if winnings are below $600, it’s necessary to declare these earnings to avoid a potential audit down the road.
- Avoid gambling in high-tax states and countries, such as New Mexico, California, Louisiana, and Belgium.
Seek Professional Advice
For those who are new to the gambling scene, seeking advice from a tax preparer or tax advisor is one of the best steps to ensure that all the gambling earnings are recorded accurately. Professional advice can help individuals keep everything, including earnings and losses, above board.
Gambling is a fun and exciting game that can make individuals rich in minutes, but it’s essential to remember that these earnings are still taxable. A sound understanding of the tax laws surrounding gambling earnings can help individuals avoid legal battles in the future. By keeping accurate records of all gambling activities and avoiding high-tax states, those involved with gambling ventures can significantly reduce their gambling-related tax burdens.
We encourage readers to seek professional help when preparing their taxes to make sure that everything is done legally above board.