The Pitfalls of Gambling and Taxes
The Internal Revenue Code is unkind to winners — and it doesn’t much like losers, either. Of course, the tax-collector first has to find out that you have won. Congress and the Internal Revenue Service know gambling is an all-cash business and few winners indeed would voluntarily report their good luck. So, statutes and regulations turn the gambling businesses, casinos, state lotteries, race tracks and even bingo halls, into agents for the IRS.
Big winners are reported to the IRS on a special Form W-2G. If winnings are to be split, as with a lottery pool, winners are reported on a Form 5754. Pooling money to buy lottery tickets is common among employees and friends. But whether there are two or 200 in the pool, there is going to be only one winning ticket, and somebody has to turn it in. If you are that someone, make sure you fill out a Form 5754. If your share of a $5 million prize is $1 million, you do not want to be stuck with paying income tax on the entire $5 million.
Gambling has become such big business that the IRS receives nearly four million Forms W-2G and 5754 each year. This tells the tax-collectors that nearly four million big winners are out there, waiting to be taxed.
Rules for Tax Reports and Withholdings on Winnings
•Slot machines and bingo: Payouts of $1,200 or more are reported to the IRS, but there is no withholding taken out.
•Keno: Similar to slot machines, but the amount won must be at least $1,500.
•State lotteries and sweepstakes: Withholding is taken out of all winnings of more than $5,000.
•Pari-mutuel pools, including horse and dog races: Subject to withholding, but only if the winnings are both more than $5,000 and at least 300 times as large as the amount bet.
The biggest problem with the taxation of gambling winnings and losses is the method congress has devised to actually tax the winnings. The method is unfair to those who do not understand the method. As everyone knows the winnings are only taxable to the extent the winnings are in excess of your losses. However, what the average individual does not understand is that all winnings and losses need to be reported on a daily basis. Thus, if you win $1000 today and you loss $1000 tomorrow your adjusted gross income is now $1000 higher. The AGI affects all sorts of items on your tax return. Just to give one example, if your AGI is too high you can loss your $1000 per child credit. Furthermore, there is a more hideous problem. The gambling loss is deducted on the schedule A.
The following is an example as to how this can be a problem. Your mother is 75 years old; she has annual retirement income of about $25,000. She and her friends go on a girl’s night out every Thursday night. One night they go to bingo, the next to the local Casino, the next to a Bowling Alley, etc. Over the course of the year your mother had winning trips to the casino and to bingo totaling $2,800, she also had losing trips of $2,900. Unfortunately for your mother, because she cannot itemize, she does have to include the income as other income and would have to pay taxes on it.