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Bet on it, gambling winnings are taxable

Have you placed a friendly wager on Super Bowl XLIV? You are so not alone.

The NFL's championship game marks the biggest betting day of the year. While lots of folks will lose money, some will win nice chunks of change.

 And it's a safe bet that many of those winners will stiff the IRS.

Yes, gambling winnings are taxable income. The IRS specifically says so.

And it doesn't say that winnings from illegal bets are exempt. Uncle Sam isn't a cop. He doesn't worry about how you get your money. He is only concerned about getting his cut. Remember Al Capone.

Some folks will intentionally ignore gambling tax rules. But for many others, there is legitimate confusion when it comes to taxes and gambling winnings.

So let me try to clear some of that up before you collect after the Saints-Colts contest Sunday night.

Winnings count as income
Let me repeat: All gambling winnings are fully taxable.

This includes, but, says the IRS, is not limited to, amounts you collect from lotteries, raffles, horse races, poker tournaments and casinos.

Note that phrase "not limited to." That means your office pool payout counts, too.

So do trips, appliance and cars you might win (or get from Oprah). You report the fair market value of the prize.

All amounts count
There's a misconception that only winnings above a certain amount are taxable. That's not true.

This incorrect assumption probably comes from the fact that official tax documents aren't issued in every situation.

When required by the IRS, casinos and race tracks get tax ID info from lucky bettors and issue each a Form W-2G. That's the case for winnings of:

  • $1,200 or more in gambling winnings from bingo or slot machines;
  • $1,500 or more in proceeds (the amount of winnings minus the amount of the wager) from keno;
  • more than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament; or
  • $600 or more in other gambling winnings where the payout is at least 300 times the amount of the wager.

In some cases, the betting establishment must even take some federal income tax withholding from your payout. That's generally a 25 percent rate, but it could at the backup withholding rate of 28 percent if you refuse to provide the payer with your federal identification number.

And even if a W-2G is not issued, all gambling winnings must be reported as taxable income.

Reporting and writing off gambling amounts
Tell the IRS about your lucky income on line 21 of Form 1040, line 21.

If you itemize, you get a chance to reduce your gambling earnings. On line line 28, Other Miscellaneous Deductions, of Schedule A, report any gambling losses. You can claim up to the total amount you won (and reported on your 1040), effectively wiping out any taxable gambling income.

Don't worry if you win big on the Super Bowl but all your losses come from bad dog track bets. Any losing wagers can be used to offset any winning bets.

Remember, though, that you can't use your bad bets to produce a loss. They count only up to the amount of your winnings.

Keep good wagering records
In order to take full advantage of your losses, the IRS requires the same thing as it does with any deduction: good records.

You don't need to include your substantiating documents when you file, but you will need them if an IRS examiner later has any questions.

The agency suggests you keep an accurate diary or similar record. You also could be asked to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

If you follow these rules, you should be OK with the IRS when it comes to your winnings. Good luck!

Lots of reporting winners: While it's a sure bet that the IRS doesn't get all the taxes it could on wagering winnings, it still collects a fair amount each year.

On 2007 federal returns, the latest year for which data are complete, the IRS says more than 1.6 million taxpayers reported almost $27 billion in gambling income. This includes winnings from casinos and horse tracks, lottery and raffle jackpots, as well as the fair market value of cars, houses and other noncash prizes.

That same tax year, 987,000 of those conscientious taxpayers who reported gambling income also claimed as deductions almost $19 billion in bad bets.

The wide world of wagering: The Internet has opened up a whole new and wider world of gambling.

U.S. laws, however, at both the federal and state levels, attempt to restrict our cyber betting. And most credit card companies have taken steps to to make placing online bets more difficult.

There is some support for allowing -- and taxing -- online gambling operations, but that's still a tough sell in Washington.

Americans who prefer real-life sports betting (aside from horse and dog racing), there are a few options.

Under a 1992 federal law, four states that had sports gambling at that time are allowed to keep their form of betting. They are Nevada, Oregon, Delaware and Montana.

Oregon dropped its sports gambling in 2007 and sports betting is minimal in Montana.

Last year, Delaware reinstated betting on sports, but, pending legal challenges working their way through court, the First State is stuck with taking bets only on multiple games at once.

So we're left with trips to Nevada if we want to place a bet on the Super Bowl or any sport. But once we get there, we can put our money down on myriad game-related events.

Known as prop bets, short for proposition bets, these are hundreds of unique ways to gamble. Essentially, if it happens (or could happen) in a game, a Nevada sports book will take a bet on it. And the possibilities aren't limited to the playing field.

Kim-Kardashian-Reggie-Bush_Leather-and-Laces-CelebrationSome of this year's goofier prop bets include:
  • How many current NFL players will be arrested during Super Bowl week?
  • How many times will CBS show Kim Kardashian ( at right), girlfriend of Saints' running back Reggie Bush, on TV during the game?
  • How many times will CBS show Bourbon Street on TV during the game?
  • What color will the Gatorade be that is dumped on the winning team's head coach?

Me, I'm betting on plain old yellow Gatorade; that's the odds on favorite. But if you want to make a bit more money, take red. That long-shot color choice is running at 12-to-1.

More on gambling and taxes from the ol' blog and elsewhere:

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Comments

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Larry Blair

Wow, those are some goofy bets, I have heard of betting on the coin toss but not the color of Gatorade, my money would be on orange, its always orange!

 how to win the lotto

I have been making bets and gambling for years and never once thought the IRS actually expected you to claim that also! Thanks for the information, good to know !!! :)

how to pick lottery numbers

Well,that gambling losses on Schedule A may kick in AMT.Making guesses is the thrill of the game. But yes, you are right, all gambling winnings are 100% taxable!!

how to win the lottery

hmm..I think that the price of a ticket would count as a deductible gambling loss. The confusion might be because most raffles are by nonprofits and people might try to deduct the price of the ticket as a charitable contribution...

the lottery black book

I like this! Lots of reporting winners: While it's a sure bet that the IRS doesn't get all the taxes it could on wagering winnings, it still collects a fair amount each year.

Ryan

If you win $10,000 in a given year, you pay roughly $3,000 in taxes. If you lose $10,000 in a given year, does the government give you $3,000? It's a joke. I understand taxing income from most jobs; it's steady income and there is no risk involved. But to heavily tax gambling winnings in which there is a large risk involved, I just don't buy that

Sports Betting Forum

don't think you would be taxed with playing online, the police can't monitor online gambling sites, though they contact your bank and the big gambling sites but other than that you won't be taxed unless decided by the gambling site owners for licensing

Brent

Wow this is new to information to me! I have been making bets and gambling for years and never once thought the IRS actually expected you to claim that also! Thanks for the information, good to know. You would think you could get in trouble for it but I guess like you mention the IRS are not the police.

How to win the lottery

So how the taxation works in online beating?

Dani Villa

I doubt if gambling expenses are taxable. Raffle tickets and donations yes. It is best to gamble in a responsible way. Best to have a limit as many people just ignore

ilotto

Gambling has always been a fun activity for me. Take this situation for example. Making guesses is the thrill of the game. But yes, you are right, all gambling winnings are 100% taxable. However, I am wondering about online gambling winnings, are these taxable as well? I guess you will answer yes because it is still considered as income. But can the government tell if someone has received money from online gambling. I am into online gambling lately and I am playing at free lotto online. Please tell me how they will tax this.

Kay

IRS Pub 3079, gaming rules for tax-exempts, (http://www.irs.gov/pub/irs-pdf/p3079.pdf) states that "Raffles are considered lotteries for the purpose of withholding and backup withholding. Withholding on gambling winnings, including backup withholding, is reported on Form 945, Annual Return of Withheld Federal Income Tax." So I would think that the price of a ticket would count as a deductible gambling loss. The confusion might be because most raffles are by nonprofits and people might try to deduct the price of the ticket as a charitable contribution. The IRS says in Pub 526 (http://www.irs.gov/pub/irs-pdf/p526.pdf) that raffle tickets are not deductible as a charitable donation. And in that same publication it then refers taxpayers to info on deducting gambling losses.

Toni McIntyre

I read somewhere, but don't remember the site, that while raffle winnings are taxable they are not gambling & you do not get to expense the cost of raffle tickets. There was an explaination but I don't remember it.
Also, remember that gambling losses on Schedule A may kick in AMT.

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