Gambling. People try to hide it sometimes. Others wear winning like a badge of honor. But when you win more than a few hundred on the lottery or at the casino, the government knows.
Form W2-G
You will know when it happens. You need to go to the lottery center to claim prizes over $600. The slot machine says, “see attendant.” When this happens, you are asked for ID and your social security number. It’s not for routine paperwork, they are informing the IRS that you won money. They issue you a form W2-G at the time you make the claim.
Tax time comes next spring and you gather all your stuff that comes in the mail. Hmmmm… nothing from the casino… Maybe the casino didn’t report it? Maybe I don’t have to report it? NO! The form they gave you at the time of the claim is the ONLY form you will get. They aren’t going to spend their time and money mailing you new ones. You need to keep the form they give you at the casino or lottery center until the next spring for tax time.
Taxes withheld from winnings
Most people assume that they will take taxes out of your winnings. This is not true. The smaller casino jackpots of a few thousand generally do not have taxes taken out unless you ask. Why? Because the casino withholds the money, keeps a separate accounting of how much they withhold for each person, and makes a monthly deposit of tax money they held back. They aren’t getting paid extra for that paperwork. They will only withhold if you ask. Often, if you start the claim process and then ask for the withholding later, they will tell you that you should have said that first and it’s too late now.
Best practice if you win at the casino, the first words to the attendant should be, “I want taxes taken out.” It seems silly but say it a few times before you start the claim process, or they may not withhold taxes.
Why should you insist on the withholding? Because you didn’t have the money five minutes ago, you won’t miss it, and most important, you won’t magically have it lying around when its time to pay the taxes on it. Insist on the withholding and you will thank me when you do your taxes next April. (Someone told me that they imagined me saying “Did you have them withhold taxes?” when they won a jackpot.)
So, I paid the taxes, right?
WRONG! This is complicated and confuses most people. Taxes are not paid in little boxes. You are taxed on the total amount of your income for the year. Your job, your spouse’s job, your social security, your retirement draws, your gambling winnings, and everything else are all added together and then you are taxed on the whole pile. People with a higher income are taxed at a higher rate. If you win $10,000 at the casino and that is your entire income for the year, you don’t pay any taxes. If you win $10,000 at the casino and you have a $40,000 a year job, you will pay taxes at a higher rate because you made $50,000.
So how could the casino possibly know how much you would be taxed? They don’t. They withhold a flat 20%. It might be enough. It might not. That is what we figure out when we do your taxes.
Another reason for withholding: Oklahoma casinos do not withhold state income tax for out of state residents. You will have to come up with the cash at tax time to pay the state income tax on your winnings. A little refund money on the federal will assure you can pay the state in the Spring.
I pay taxes on my Social Security check now, too?
To complicate things more, if you or your spouse receives Social Security, your winnings might cause that to be taxed as well.
Wait, what?
Yes. Social security is taxable income sometimes. If you are not married and all your other income (including gambling) plus half your Social Security comes to more than $20,000, your Social Security is also taxed. If you are married, all your combined income plus half your Social Security needs be less than $32,000 to avoid taxes. This is calculated on the total winnings without deducting any losses. One jackpot could start a tax avalanche you didn’t expect. Be sure to set some of your winnings aside or calculate how much you will owe ahead of time.
Note: filing separately does NOT avoid using your spouse’s income to calculate if your social security is taxable. The IRS will figure out what you did in a few years and send you a bill with penalties and interest for doing it wrong.
But I can deduct my losses, right?
I hate having to give this answer, but it’s true: It depends. The tax law changes that started in 2018 adjusted the standard deduction to almost double what it was before. Gambling losses are taken as an itemized deduction along with charitable giving, mortgage interest, and property taxes. The standard deduction for 2019 was $24,400 for married couples. Unless you had a large number of gambling losses, you probably get a better deal taking the standard deduction on the federal. States vary, so check your local rules.
However, if you are a regular player at the casino and win numerous jackpots per year, you can deduct your documented losses up to the amount of your winnings. So how does the IRS want you to document your losses? You need to keep records of all your gambling wins and losses. It is your job to keep a log of how much you played and how much you won. If you don’t have records, you can’t deduct it. (Who is going to keep a logbook in the casino? Seriously?) So, what do you do?
Here’s what I tell my clients: Buy a stapler and keep it in your car. When you get to the casino, get your cash from one of their machines. Keep the ATM receipt. If (when) you win, get the W2-G. When you go back to your car, staple your ATM receipts together with any W2-G forms (if you won) and write on the back how much cash you have left. There you go. You now have a record of your wins and losses for the day. What if you didn’t win? That’s ok. You documented the loss for today. Keep your packets in a safe place until tax time next spring. It’s not uncommon for me to get a few people that bring me bags full of daily packets. I save them far more in taxes than it costs them for me to total their wins and losses.
A couple of What-ifs
What if I have a huge pile of old scratchy tickets? Can I deduct those? It’s doubtful. Unless you have records of what day you bought all the scratchers and the wins you had, it is not a good idea. You can deduct all your gambling losses from all types of gambling, but you need to have good records. You are not the only person who thought of mining losing scratchers from the trash. Unless you have a log, you can’t deduct it.
What if I lose my W2-G forms? Unfortunately, the IRS still knows about them. You can retrieve them from the IRS, but often they are not available until after April 15th. If you file an extension so you can retrieve them later, your tax payment will be late if you wind up owing.
What if I didn’t document my ATM withdrawals? You will have to think of some way to show what you spent. Do you use a rewards card? Sometimes the casino can tell you how much you put in the machines. Do you go to the bank on the way? Maybe check your bank statements for withdrawals on the days you had winnings. Rebuilding records is never fun, but it is not impossible.
Main Take-Aways
1 – Always have the taxes withheld. Every time.
2 – Keep all Forms W2-G in a safe place.
3 – Keep a clear record of your spending. (Buy a stapler!)
4 – If you or your spouse gets Social Security, you might owe taxes. Set some aside.
5 – File your taxes on time every year if you have reported winnings on a form W2-G.
6 – Gambling should be fun and exciting. If your gambling is causing a problem, you have a gambling problem. Free, anonymous help is available here: https://www.ncpgambling.org/help-treatment/national-helpline-1-800-522-4700
Like this post? Check out more from Grass Roots Taxes:
36 Things Your Accountant Can Do For You
What to Bring to Do Your Taxes
What’s all this stuff taken out of my check?
