Tax Implications of Prize Winnings
For most individuals, income often comes in the form of salary, commission, tips and other job-related earnings. What many do not realize is that there are other, more creative ways one might find themselves with income, and Uncle Sam has made it his mission to attempt to capture all of them within the tax code. One such type of income we tend to forget about is income generated when an individual acquires prize winnings.
What is Considered Gambling Income?
Just as unpredictable as gambling can be are the types of winnings and earnings that can be considered prizes and thus as income.
Often when we think of prize winnings we think of cash won in a game of slots, poker at the casino, or cash earned by winning the lottery. Though these are in fact considered winnings and taxable income, other, less tangible prizes can be considered income as well. Examples of other winnings that would be subject to income taxation are cash values for vacation prizes, MSRP prices on vehicles won, and cash values for gift cards. Next time you see an individual win a brand new car or vacation on a TV game show, remember that the entire value of that car or trip is subject to taxation.
How Are Winnings Reported?
For those who do not gamble for a living and prefer the recreational route, requirements for reporting and withholding taxes on winnings depend on the type of gambling, the amount won, and the ratio of winnings to the original bet. For general gambling winnings (excluding lotto and slot or bingo winnings), any payout that is at least $600 in value and at least 300 times the amount of the original bet is required to be reported to the IRS by the payer. For lotto winnings and slot or bingo winnings, the payer must report earnings to the IRS if they exceed $1,500 and $1,200 or more, respectively, between lotto and slot/bingo winnings. Any winnings reported to the IRS will trigger them to send you a Form W-2G that you will then need to report on your tax return.
Essentially, chances are that if you have Lady Luck on your side and hit the jackpot, the amount you win will be reported to the IRS, and you will not be walking away with all of it. When the payer reports your winnings to the IRS, they will generally reduce your payout by withholding federal taxes at a 25% rate. Regardless of what type of earnings or prizes you win, be sure to check whether there was an amount withheld from the prize and, if not, ask for the appropriate amount.
When Do I Need to Report Prize Winnings?
Though the IRS does specify minimum amounts that payers must report as earnings, it is the responsibility of every taxpayer to report all good fortune back to Uncle Sam regardless of the amount. All prize winnings reported on form W-2G or smaller jackpots not reported on this form are entered on Form 1040– Schedule 1, line 21, Other Income. Additionally, cash value of vacations, vehicles and other merchandise won are reported here. Be sure to include all gambling or prize winnings whether they were reported to the IRS or not for the tax year you earned them.
How Can I Reduce My Taxes Owed?
As gambling and prize winnings are included in your calculated Gross Income, they can be reduced by taking itemized deductions if you are eligible – that is, if they exceed the standard deduction. On top of reporting mortgage interest paid, property taxes, income or sales taxes paid, medical payments and other itemized deductions, you can also deduct your gambling losses up to the extent of your winnings.
So if you won $12,000 at the casino in January and lost $15,000 in February of the same year, you would only be able to reduce your $12,000 in winnings with a $12,000 deduction. One thing to keep in mind here is that the IRS does not allow you to directly offset gambling winnings with dollar for dollar losses and report the net profit as you can do with capital gains. You must always report your winnings regardless of whether or not your net losses during that tax year exceeded them. As a result, deducting your losses only allows you to reduce the taxes owed on your winnings, but nothing more.