How Does the IRS View Gambling Winnings?
According to the IRS, gambling winnings are always taxable, regardless of the amount or the source. For example, a taxpayer who wins the lottery is required to pay federal income tax on his or her winnings. However, a taxpayer who wins a new car on a game show is also required to pay federal income tax on the value of the prize. All items of monetary value that a taxpayer wins from gambling are considered taxable.
In most cases, the institution or company that awards the prize issues a Form 1099-G at the end of the year to report the amount of taxable gambling income to the taxpayer. But, even if the taxpayer does not receive this form, he or she is still obligated to report the winnings as taxable income for that year.
How to Deduct Gambling Losses
The good news for these taxpayers is that they can often offset the amount of their taxable winnings by deducting their gambling losses. In some instances, these losses will be entirely deductible. The criterion for deducting gambling losses is that taxpayers can only write off the amount that is equal to their winnings. As an example, if a taxpayer loses $1,000 while gambling but wins $500, then he will only be able to deduct up to $500 of his losses. The IRS does not allow taxpayers to simply deduct losses when there are no winnings.
Reporting Gambling Winnings and Losses
To report gambling winnings, a taxpayer will include the amount of the prize as income on the annual tax return. Many companies allow winners to have their taxes deducted from the prize right away, which saves a lot of trouble at tax time. Those who don't elect to do this typically are required to make estimated tax payments throughout the year to cover the amount of tax they will likely owe.
A taxpayer who has gambling losses can deduct them on Schedule A under the "Miscellaneous Deductions" category. As a miscellaneous deduction, gambling losses are subject to the 2 percent limit, which means that they must exceed 2 percent of the taxpayer's adjusted gross income in order to be eligible for deduction. Since they are reported on Schedule A, a taxpayer who wants to claim gambling losses must itemize deductions.
Both gambling losses and gambling winnings can have an impact on a taxpayer's tax liability for the year. Learning how to report them properly will keep a person from receiving an unexpected tax bill later.
