The IRS has this rule: every penny of income any citizen receives must be reported. Period.
There isn’t a dispensation for yard sale income, there isn’t a dispensation for renting your camper to your brother-in-law.
And there isn’t a dispensation for gambling proceeds.
It doesn’t matter the source of the gambling winnings. Whether it is $1.00 in a scratch-off or $1 million at the slots, the IRS wants you to report it on line 21 of your 1040 form.
Now, a lot of that reporting is left to the individual to declare, meaning there is no “official” record of the prize (think turning in a $5 winning lotto ticket at the gas station – no one takes your social security number before they hand you a $5.00 bill.) The IRS is counting on the honesty of the taxpayer here.
However, under certain circumstances, like how much you won and where you won it, there needs to be a form W2G issued, and taxes must be withheld.
The form W-2G is a lot like a W-2, at least in terms of the reason it exists. It reports income to the IRS and lists amounts withheld for taxes. It doesn’t look exactly the same – the boxes are different – but it serves the same purpose.
Who gets a W-2G? Here are the requirements:
- $1,200 or more (not reduced by the wager) from a bingo game or slot machine.
- $1,500 or more (reduced by the wager) from a keno game.
- More than $5,000 (reduced by the wager or buy-in) from a poker tournament.
- Lottery, raffle winnings and other winnings (except those listed above) that are $600 or above, as long as they are at least 300 times the wagered amount.
Withholding is 25% of winning amount if the winner is cooperative and provides their social security number. If they don’t, and the winnings are at the levels listed above, the organization will withhold and send to the IRS 28%, a so-called “backup withholding”. For most taxpayers, their “true” tax rate (not their bracket) is less than this, so this does not represent any type of savings. In fact, reporting the withholding will likely get them a refund of all or part of the amounts withheld.
At tax time the taxpayer gives the W-2G(s) to their tax preparer, so that the amounts won can be included in income. They should also bring along their proof of losses. Losses can be deducted on Schedule A, up to the amount of winnings, which offsets the winnings for tax purposes. If you have enough losses to offset your entire winnings, and you are able to file schedule A, then any withholding would theoretically come back to you when you file your taxes (ask your tax preparer to explain the “ins and outs” of this.) Proofs of losses can include receipts, losing tickets, diaries or logs of bets made, dates, locations and amounts, or statement printouts from casinos that show wins and losses.
