Gambling Income Tax Reporting

1. Gambling Income Tax Reporting 2019
2. Gambling Income Tax Reporting Rules
3. Reporting Gambling Income On Tax Return
4. Gambling Income Tax Reporting Statute Of Limitations

Gambling income is taxed federally. Many states with an income tax will also require you to report winnings, especially those where casinos and sportsbooks are becoming legal. Of special note, the only state for years where casino gambling was legal, Nevada, did not tax gambling income. If gambling happens to be your real profession then, your revenue will be tagged as regular earned income hence, it will be taxed at the normal effective income tax rate of a taxpayer. Keep in mind that your income and expenses compulsorily must be recorded on Schedule C, if you are self-employed. Today: gambling losses, mortgage interest and property taxes. Log In Receive full access to our market insights, commentary, newsletters, breaking news alerts, and more. Gambling might be an enjoyable pastime for some and it might provide a nice adrenaline rush when you win, but your winnings are subject to federal income tax, and possibly to state taxes as well. The IRS requires that you report the money as income, although it does allow you to claim a deduction for at least some of your losses.

Professional gamblers are treated differently from amateur gamblers for tax purposes because a professional gambler is viewed as engaged in the trade or business of gambling. The professional gambler reports gambling winnings and losses for federal purposes on Schedule C, Profit or Loss From Business. To compute his or her business income, the professional gambler may net all wagering activity but cannot report an overall wagering loss. In addition, the taxpayer may deduct 'ordinary and necessary' business expenses (expenses other than wagers) incurred in connection with the business.

Whether a gambler is an amateur or a professional for tax purposes is based on the 'facts and circumstances.' In Groetzinger, 480 U.S. 23 (1987), the Supreme Court established the professional gambler standard: 'If one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.' The burden is on the gambler to prove this status.

In addition to applying the standard established in Groetzinger, courts sometimes apply the following nonexhaustive nine-factor test in Regs. Sec. 1.183-2(b)(1) used to determine intent to make a profit under the hobby loss rules to decide whether a taxpayer is a professional gambler:

• The manner in which the taxpayer carries on the activity;
• The expertise of the taxpayer or his advisers;
• The time and effort the taxpayer expended in carrying on the activity;
• An expectation that assets used in the activity may appreciate in value;
• The taxpayer's success in carrying on other similar or dissimilar activities;
• The taxpayer's history of income or losses with respect to the activity;
• The amount of occasional profits, if any, that are earned;
• The financial status of the taxpayer; and
• Elements of personal pleasure or recreation.

What if a professional gambler's 'ordinary and necessary' business expenses exceed the net gambling winnings for the year? In Mayo, 136 T.C. 81 (2011), the court held the limitation on deducting gambling losses does not apply to ordinary and necessary business expenses incurred in connection with the trade or business of gambling. Therefore, a professional gambler may report a business loss, which may be applied against other income from the year.

LIMITATIONS ON LOSS DEDUCTIONS

Some states do not permit amateur gamblers to deduct gambling losses as an itemized deduction at all. These states include Connecticut, Illinois, Indiana, Kansas, Massachusetts, Michigan, North Carolina, Ohio, Rhode Island, West Virginia, and Wisconsin. A taxpayer who has $50,000 of gambling winnings and $50,000 of gambling losses in Wisconsin for a tax year, for example, must pay Wisconsin income tax on the $50,000 of gambling winnings despite breaking even from gambling for the year.

Because professional gamblers may deduct gambling losses for state income tax purposes, some state tax agencies aggressively challenge a taxpayer's professional gambler status. A taxpayer whose professional gambler status is disallowed could face a particularly egregious state income tax deficiency if the taxpayer reported on Schedule C the total of Forms W-2G, Certain Gambling Winnings, instead of using the session method under Notice 2015-21. In this situation, the state may be willing to consider adjusting the assessment based on the session method if the taxpayer provides sufficient documentation.

For a detailed discussion of the issues in this area, see 'Tax Clinic: Taxation of Gambling,' by Brad Polizzano, J.D., LL.M., in the October 2016 issue of The Tax Adviser.

—Alistair M. Nevius, editor-in-chief, The Tax Adviser

The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.

Gambling Income Tax Reporting 2019

Also in the October issue:

• An analysis of executive compensation clawbacks.
• An update on recent developments in estate planning.
• A look at revisions to Forms 1042-S and W-8BEN-E.

AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year.

Winning while gambling is fun; however, most people agree that payingtaxes is the opposite.

If you’re an Illinois resident who wins a jackpot while gambling, unfortunately, the IRS and the state of Illinois will demand its cut of your profit.

Uncle Sam and the Land of Lincoln consider gambling winnings personal income, regardless of how you acquired them.

So, whether you buy a winning lottery ticket, have a lucky pull on a slotmachine, win at the craps table, make a clever sportsbet, are the last person standing in a poker tournament, leave a video lottery terminal happy or have a good day at the racetrack, this rule applies.

Most Illinois gambling companies will automaticallywithhold a portion of your winnings for tax purposes. However, that doesn’t necessarily mean you won’t owe additional money when you file your tax return.

While tax professionals best handle specific situations, there are tax guidelines for all Illinois gamblers to follow.

Firstly, you should know when you should report your winnings on your returns.

Do I need to report my winnings to the IRS?

Yes. A failure to report gambling winnings could put you at risk of underpayment, which could lead to fines and interest payments.

There are some general guidelines for gauging whether you need to report your gambling winnings on your personal tax returns, however. Those thresholds are:

• Your winnings from playing bingo or slots (not reduced by the wager) are at least $1,200.
• Your winnings from a keno game (reduced by the wager) are at least $1,500.
• The amount of your winnings from playing poker (reduced by the wager or buy-in) are at least $5,000.
• The amount of your winnings from any othergambling types (except winnings from bingo, slot machines, keno, and poker tournaments), reduced by the wager, are either $600 or more or at least 300 times the amount of your wager.
• Your winnings are subject to federal income tax withholding for any other reason (either regular gambling withholding or backup withholding).

Pay attention that these thresholds are for an entire tax year. For example, if you get a $200 profit on three separate occasions from betting on sports, that would cross the $600 level.

If you accrue winnings over any of these levels, you need to report them to the IRS and the Illinois Department of Revenue. For your federal tax return, the form you need is the W-2G.

Do I need to fill out a W-2G form?

In most cases, you shouldn’t have to fill out the W-2G form. That’s the responsibility of the casino, racetrack, off-track betting site, sportsbook or VLT machine operator.

Provided the operator has the correct information, each entity you gambled with during a tax year will send you a completed Form W-2G.

This form tells the IRS and you two things:

• Your total winnings from that source for the entire tax year.
• Any amount the entity withheld from your winnings for tax purposes.

If they have your taxID (like your Social Security number), it’s standard for casinos and other gambling companies to automatically withhold 25% of your winnings. Without that information, they may withhold as much as 28%.

If you’ve gambled with more than one company over the course of a tax year, you should get a W-2G form from each one. Don’t file your income tax return until you’ve received all the W-2G forms you expect.

How do I report winnings to the IRS using W-2G forms?

Once you’ve received all the W-2G forms you expect, you need to transfer the amounts shown on those forms to your federal income tax return.

The first step to doing so is adding up the amounts in Box 1 of all the W-2G forms you have.

Once you have that total, list it as “OtherIncome” on Form 1040, Schedule 1. The total of all income that fits that classification then goes on Line 7a of your Form 1040.

Attach Schedule 1 to your Form 1040. Box 2 on your W-2G form(s) show(s) the amounts that the entity or entities you gambled with withheld from your winnings for tax purposes during the year.

Again, add those amounts up if you have more than one W-2G. That total then goes on Line 17 of your 1040. Do not attach any of your W-2G forms to your 1040.

Keep these forms in your records for at least five years. At that point, you’ve completed your obligation to report your gambling winnings to the IRS.

Whether or not you will have to pay tax on your winnings depends on how much you won, how much the gambling company withheld, and what is the federal tax rate.

Now, it’s on to your state taxes.

Illinois state taxes for gambling winnings

The state of Illinois considers all gambling winnings to be personal income. Again, how much you will owe depends on how much income you collected from all sources during the year.

Currently, Illinois has a flat tax rate of 4.95% for all residents. That could change for 2021 and beyond, however, if Illinois voters approve of a constitutional amendment that would authorize a graduated tax.

If you’re a full-time Illinois resident, you should report your gambling winnings on Form IL-1040. If you won cash or a prize gambling within Illinois, you would need a Schedule M and a Schedule IL-WIT.

Schedule M lets the Illinois Department of Revenue know how much you made in profit from in-state gambling over the course of the tax year. Again, this is where your W-2G forms come in handy.

Add up all the amounts from Box 1 on all your W-2G forms. Then, put that amount on Line 11 of your Schedule M and denote it as gambling winnings. The total from Line 12 of your Schedule M goes on Line 3 of your IL-1040.

Attach the Schedule M to your IL-1040. Again, do not attach your W-2G forms to your state return. Schedule IL-WIT is how you report any amounts withheld from your winnings by a gambling company in Illinois.

Report each W-2G form on a separate line on the Schedule IL-WIT. Then, transfer your total from Line 11 to Line 25 of your IL-1040. Attach the Schedule IL-WIT to your IL-1040.

How do I report out-of-state gambling winnings?

If you won cash or a prize gambling in another state and that gambling company withheld state income tax there, you could claim that as a credit against your Illinois tax liability.

Use a Schedule CR for that purpose. Put your total non-IL gambling winnings in Column B, Line 15. Then, put the amount paid to another state on Line 51.

Once you’ve completed all the steps, put your amount from Line 55 on your IL-1040 on Line 15. Attach Schedule CR to your IL-1040.

All these steps are made easier with the all-important W-2G forms. However, if you don’t receive one, that doesn’t mean you’re off the hook for reporting your gambling winnings.

What if I didn’t get a Form W-2G?

If you didn’t receive a W-2G form, you should contact the company where you won cash or a prize money while gambling.

The operator might have incorrect address information or there may have been some other oversight made that you can help them correct.

If that doesn’t get a Form W-2G in your hands, that doesn’t mean you’re off the hook for reporting your gambling winnings, however. At least some, if not all cases, the tax you would owe has already been withheld, so you’re only hurting yourself by not reporting.

If you underreport your income, the Illinois Department of Revenue and/or the IRS can levy fines against you, seize your assets, garnish your pay and charge interest against your back taxes. In the long run, you save money and time by following the law.

If you’re uncertain of how much you won, bank statements and gambling companies’ rewards accounts can be helpful.

Some winners also have similar questions about what to do regarding non-cash prizes.

What if all or part of my gambling winnings weren’t cash?

If you won a boat, car, house, etc., gambling, the IRS and the IL Dept. of Revenue do levy taxes upon those prizes. The entity granting the prize should submit a federal Form 1099 with your tax information stating the fair market value.

That amount goes on Line 21 of your federal Form1040.

For your state taxes, you would report it the same as you would cash winnings, again, using the gambling company’s fair market value on the 1099.

The same goes for if you win cash playing a multistate lottery game like MegaMillions or Powerball. The IllinoisLottery participates in those games, so you would report it in the same way you would report winnings from an IL lottery game.

If you’re part of a group of people who pooled your money to buy a lot of lottery tickets and split a prize, there’s a special procedure for that situation. It does require a little bit of work on your end.

What if I’m part of a group of people who won a prize gambling?

If you are among a group of people who split prize winnings, meet federal Form5754.

On that form, you’ll put information like addresses, names, and tax IDs about everyone in the group. Once you’ve filled it out, make a copy for everyone in the group.

Then, submit the original to the entity granting the prize. That company will use that information to send everyone an individual Form W-2G.

Once you’ve got that, you can go through the standard procedure of reporting those winnings to the IRS and the IL Department of Revenue. Do not attach the 5754 to your federal or state tax returns. Keep it for your records.

Now that we’ve gone through all the scenarios, there is a bit of good news. The IRS does afford you some wiggleroom on gambling.

What can I deduct from my taxes related to gambling?

Gambling Income Tax Reporting Rules

You can deduct your gambling losses from your federal income tax liability, but only if you choose to itemize your deductions. It would still be beneficial to take the standard deduction even if you gambled regularly in some cases.

You can only deduct what you lost while gambling. If you stay in a hotel, eat at a restaurant, get something to drink, etc., while you’re gambling, those expenses are notdeductible.

Additionally, the IRS does not allow you to deduct more in losses than the winnings you report. Also, note that the Illinois Department of Revenue does not allow you to deduct gambling losses from your state liability.

If you do elect to itemize your federal deductions, calculate all your gambling losses from the year.

Place that total on Line 28 of Schedule A, Form 1040. Also, keep detailed records of the gambling losses you deduct for a period of at least five years.

Once again, this is where joining gambling companies’ rewards programs can be helpful. The programs can provide you with a detailed list of your losses over the course of a year’s time. Online sportsbooks are great at making this easy.

Sports betting winnings and taxes

Online and retail sportsbetting is the newest form of gambling in Illinois. For tax purposes, however, it’s the same as any other form.

If your cumulative winnings over the course of a year surpass $600, you must report that as income.

Reporting Gambling Income On Tax Return

You should receive a Form W-2G from each sportsbook that paid out to you over the course of a year. Again, use the information on those forms to report your winnings to the IRS and the state.

You can deduct the amounts you wagered and lost on your federal taxes if you itemize your deductions. You can’t deduct wagers from winning bets, however.

Gambling Income Tax Reporting Statute Of Limitations

Regardless of where your gambling winnings came from, your tax responsibilities are the same. Once you’ve paid and reported, the rest is yours to enjoy as you please.