The exhilaration you experience when your horse crosses the finish line first—or your numbers hit in roulette—is incredible. It sets off an adrenaline rush that fuels excitement and a surge of joy, making the moment truly unforgettable. You’re so excited, in fact, that it never crosses your mind that you might owe gambling taxes. We never like being the bearer of disappointing news, but come tax time, it’s our job to remind clients they might have to give the government its fair share of their winnings.
Why Do People Have to Pay Gambling Taxes?
Many people are unaware of the tax obligations associated with gambling. And misguided advice or a lack of knowledge often leads them to underestimate or disregard the need to report and pay taxes on their winnings.
Though it might seem unfair to pay taxes on something that feels like a gift, you must pay up come tax time for several reasons.
- In the United States, gambling winnings are considered taxable income. So, just like other forms of income like salaries or profits, your gambling winnings are subject to taxation.
- Gambling tax requirements help control and regulate the gambling industry, mitigating potential negative consequences. In some cases, gambling tax revenue is used to fund gambling addiction helplines and other initiatives aimed at minimizing the sport’s harmful effects.
- The government views individuals who benefit financially from gambling activities the same as those who earn income through other means.
Tax laws can differ based on local policies and regulations, so it’s always a good idea to consult with a tax professional about your gambling tax obligations, if any.
How Are Gambling Taxes Calculated?
Even though Texas doesn’t permit most forms of gambling or sports betting in the state, Texas residents are not prohibited from traveling to nearby states or going online to gamble. However, any winnings, even if they’re from out-of-state, are subject to federal tax. And, yes, winnings from fantasy sports contests are also taxable.
If your winnings meet defined thresholds, the gambling establishment or whoever pays your winnings must issue a Form W-2G. If they forget or don’t issue one, you are not off the hook for your gambling taxes. If you are preparing the W-2G for someone else, you must also file Form 5754.
The IRS sets taxable winning thresholds as follows:
- Bingo and slot machines: $1200, not reduced by the wager.
- Keno: $1500 reduced by the wager.
- Poker tournaments, lotteries, wagering pools, and sweepstakes: $5000 reduced by wager or buy-in.
- Horse racing: $600 or more if it’s 300 times your bet.
- Fantasy sports: If you win more than $600, you may receive a 1099-Misc or 1099-K, which should be filed with your tax return.
Plus, regardless of your tax bracket, the IRS requires 24% of your winnings to be withheld on the spot. However, depending on your tax bracket, you could owe Uncle Sam up to 37% of your winnings. People who accept lump sums on major jackpots often fall into this tax category.
The good news is that Texas has no state gambling taxes, so reporting gambling winnings on your state income tax isn’t required. You might also be able to deduct gambling losses on Schedule A of 1040. Just be sure to keep thorough records and receipts of your winnings and losses.
One last thought. Even if your winnings are below the thresholds, you’re still legally obligated to report them as income.
To learn more about gambling taxes or to arrange a tax consultation, contact Gurian CPA Firm online or call 469-374-3151.
