Did you ever sit back and daydream of listening for the winning lotto numbers and hearing all the numbers on your ticket called? You’re not alone. According to Gallup, approximately half of Americans play state lotteries every year. Even more people go to casinos and try their luck on slot machines or participate in local raffles for charities. Well, if you are one of the lucky ones and win the lottery or hit the jackpot, you have every right to be excited. Just keep in mind that the full amount won’t be all yours to spend.
If you win a lot of money, you’ll probably also pay a lot in taxes. Money that’s won through gambling is considered a part of your taxable income, and the Internal Revenue Service cautions that it must be reported on your tax return as such. Whether it’s money from a school raffle, a poker tournament, a state lottery or a casino, any gambling operation that pays you prize money above a set amount must file Form W-2G. You are probably also going to be required to pay taxes on valuable prizes such as trips, houses, cars and other non-cash prizes. The W-2G requirements for reporting will depend on the amount of money you won, the type of gambling you were engaged in and even the ratio of winnings to the wager.
What Is a W-2G Form?
The W-2G Form from the IRS reports winning funds and withholdings that are related to gambling. A gambling operation completes it, and a copy is sent to both the winner and the IRS. Gambling companies complete these forms for all qualifying prizes. The form itself and the W-2G instructions are simple and straightforward. As the winner of the money or prize, you will be listed as the winner. Your name and address will be placed at the top left of the form just under the payer’s information.
Box 1 reveals the exact amount of money you won or the value of your prize. Box 2 shows the date that you won. Box 3 lists the type of wager that led to the winnings, while Box 4 states the amount of federal income tax that’s been withheld from your winnings. Boxes 5 through 10 tell details about the winning situation, including the transaction, race, winnings from identical wagers, your taxpayer identification number, cashier and window. Boxes 11 and 12 lists the first and second IDs you used to prove you are the declared winner. Boxes 13 through 18 ask for details like the payer’s identification number, the state income tax that was withheld and the local income tax that was withheld.
Reportable Winnings With Form W-2G
A gambling enterprise files a W-2G form if winnings exceed a specified amount. As of 2018, winnings (not reduced by the wager) from a bingo game or slot machine that are $1,200 or higher necessitate Form W-2G. So do winnings (not reduced by the wager) from a keno game that are $1,500 or more. If a poker tournament pays winnings (not reduced by a buy-in or wager) that are $5,000 or more, they must file a W-2G. With the exceptions of winnings from slot machines, keno games, poker tournaments or bingo games, the rules are a little different.
For other monetary (and non-monetary) prizes, the gambling operator files a W-2G if the winnings were at least $600 and at a minimum of 300 times the amount of the original wager. Therefore, a $1 scratch-off lottery ticket that resulted in a $200 payout may not necessitate the filing of Form W-2G. However, a $1 scratch-off that produced a $400 payout would. Gambling enterprises can use Form W-2G for winnings that are less than the listed minimums, though. If the gambling operation never sends you the form, you are still responsible for both reporting those winnings as income and paying taxes on the money.
Withholdings From Winnings
Since your prize money counts as income, gambling enterprises will typically withhold federal income taxes. Effective for the taxable years that begin after December 31, 2017, the standard withholding rate for winnings of $5,000 or more from sweepstakes, lotteries, wagering pools, certain parimutuel pools and jai alai is 24 percent. Before 2018, the standard withholding rate was 25 percent. Also, starting with the taxable years that begin after December 31, 2017, the backup withholding rate is 24 percent. It was formerly 28 percent.
Keep in mind that the tax rate you will ultimately owe will depend on factors such as your total income for the year, so don’t assume that you will owe or may be owed a refund until you have completed your tax return. If the gambling operator withheld too much in taxes, you'd receive a refund. That may feel like winning a hefty sum all over again. Unfortunately, if too little was withheld, you may discover that you owe more money in federal taxes. State and local taxes vary throughout the U.S.
Whether you win a new car on a television game show or a new living room set in a raffle, those winnings also must be taxed. When you receive prizes, they’re considered non-cash payments. They are considered at fair market value for taxation purposes. If the fair market value of a prize is over $5,000 (after deducting the price of the wager), the prize is assessed at the regular 24-percent gambling withholding.
Next, one of two things will happen. The winner pays the withholding tax to the gambling enterprise who awarded the prize. In such a situation, the withholding is 24 percent of the fair market value of the prize minus the amount of the wager. The other situation may be that the payer (the gambling enterprise) pays the withholding tax themselves. In that situation, the withholding is 31.58 percent of the fair market value of the prize minus the amount of the wager. If you pay the withholding tax at 31.58 percent, enter the sum of the non-cash payment and the withholding tax in Box 1 of Form W-2G and then enter the withholding tax that’s paid by the gambling entity in Box 4.
Filing Your Taxes
When filing your taxes, report all your winnings on your Form 1040 as "Other Income" (line 21). Keep in mind that you need to include all winnings for the year on this line, even those that weren’t reported on a Form W-2G. If you were the lucky winner of prize money, file Form 1040. You may be required to pay an estimated tax of your extra income. Before doing your tax return, you need to know you and your spouse’s filing status. Also, know the precise amount of your gambling winnings and losses. Also, keep Form W-26 on hand for information while filling out Form 1040.
The Upside of Losing
When trying to be optimistic, some may say that even losing can lead to wins. Well, that’s true when it comes to doing your taxes on gambling losses. At least you may be able to claim a tax deduction for all the gambling losses you incurred up to the amount of your prize money. Be aware that you are only allowed to deduct your gambling losses if you choose to itemize your deductions on Form 1040, Schedule A. Additionally; you are only allowed to claim the deduction if you’ve kept a regular, accurate record of your winnings and losses over the year. Be prepared to present tickets, statements, receipts and other records. If you qualify, claim your gambling losses as Other Miscellaneous Deductions, Once your losses reach the total of your earnings, you can’t deduct any more of them.
Winnings for Nonresident Aliens
If you are considered a nonresident alien of the U.S. for the purposes of filing your income taxes, you must use Form 1040NR if you won the lottery or have other gambling winnings. Fill it out completely and file it. Keep in mind that non-resident aliens cannot deduct losses on their income tax no matter how much they gambled and lost in the past year.
State and Local Taxes
Parts of the Form W-2G are provided for your convenience. For example, Boxes 13, 14 and 15 on the form are there to help you with state taxes. If the gambling entity doesn’t complete these boxes, that’s fine with the IRS. If the gambling organization withheld state income tax on income from gambling winnings, that figure is placed in Box 15 of the W-2G form. If the company fills in Box 15, though, they should also fill in Boxes 13 and 14. In Box 13, they’ll fill in the state identification number that’s assigned by each state. If the tax department of the state requires that a Form W-2G be sent to them, the gambling entity should send Copy 1 from the forms from the IRS. Copy 2 should go to the winner.
Much like the boxes for state taxes, Boxes 16, 17 and 18 are provided for convenience and aren’t required by the IRS. If local income tax was withheld on the payment of gambling winnings, that figure goes in Box 17 of the W-2G form. If that box is complete, Boxes 16 and 18 should also be filled.
Think Before You Accept
The tax responsibility for a prize can sometimes be daunting to winners. This is especially true if they don’t have a lot of cash or personal possessions. Their need for furnishings or other prizes like cars or even vacations may have prompted them to try and win something in the first place. But before you enter a raffle or go on a game show to try to win a new living room set, consider whether the tax responsibility for it would be prohibitive for you. Also, look into whether the gambling entity will pay the withholding tax. While Form W-26 provides a lot of valuable information for doing your taxes, it won’t be helpful if you don’t have the funds available to pay the taxes on an expensive prize.
Report the Small Stuff
If you don’t get a Form W-2G because your earnings were too small or otherwise didn’t necessitate the completed form, don’t worry. However, you are still responsible for reporting any of those earnings to the IRS on your tax return. Any prize or awards you won during the year need to be reported. If you won multiple prizes, add them together along with the fair market value of any non-cash prizes. While you do need to report all the earnings, you may not have to pay taxes on those earnings if you are claiming deductions. Since you may claim losses up to the amount of your winnings, depending on the situation, you may not have to pay.