When You Hit the Jackpot, So Does the IRS

Hitting it big at a Vegas casino only to ride off into the sunset with stacks of cash is a fairly common dream. And like many dreams, it’s largely rooted in fantasy. If you’re planning to hit the strip sometime soon, rather than imagine your new home renovations or new yacht, first consider the tax implications if you’re one of the lucky few to hit it big.

The Internal Revenue Service (IRS) requires all casinos in certain instances to withhold federal taxes if you win over a certain amount. The percentage withheld ranges between 25 and 30 percent, depending on how you won. Here is how it works.

If someone hits it big, it can be considered a taxable event. When a taxpayer’s winnings exceed a specified threshold and/or tax is withheld, the casino will give you an IRS Form W-2G showing the amount you won and the amount of tax withheld. Be certain to report—and take credit for the tax you paid—on your IRS Form 1040 tax return at the end of the tax year.

Generally, gambling winnings are reportable to the IRS if the amount paid is:

1. $600 or more, and
2. at least 300 times the amount of the wager

This requirement primarily applies to lotteries, sweepstakes and other big winnings from small bets.

These requirements do not apply to winnings from bingo, keno and slot machines. Casinos report gambling winnings for these games to the IRS when a player wins $1,200 or more, or if the proceeds are $1,500 or more from a keno game. When you exceed these amounts, the casino may withhold taxes and will provide you with IRS Form W-2G. They will keep the original and give you two copies of the form.

The rules are different for table games like blackjack, poker, baccarat, craps, roulette or other spinning wheel games. Since Nevada casinos do not know the amount you started with, they are not able to determine how much you won. Taxable events are determined by one’s gains through any transaction. As a result, federal law provides that there is no withholding or even reporting of table game wins to the IRS. The best practice would be to declare your winnings in your personal taxes as you walk away from the table with any substantial amount.

If a winner refuses to provide a Social Security Number, the casino is required by the IRS Information Reporting rules to withhold 28 percent of the payout as income tax. At times, it may be casino policy to withhold taxes whether or not people provide any information. The withholding tax is 30 percent if it involves a foreign gambler. The tax rate is 24 percent if the amount is over $5,000 (except for non-resident aliens).

In every negative there is also a positive when it comes to taxes. You may have to pay taxes on gambling profits, but you can also claim gambling losses as an itemized deduction. So, while the government may take from your winnings, you may offset some of your other tax burdens by claiming your losses at the casinos. To do this, you must keep documentation to substantiate the amount and nature of the losses. While this may sound like an answer to all gambling woes, it can only go so far. In any event, you cannot claim gambling losses that exceed your winnings.

To be certain, if you are planning on betting a substantial amount of income in the deserts of Nevada, document everything, no matter how bad or wonderful they may be. And if it becomes a part of your life, be certain to contact a CPA or an experienced and reputable tax attorney to plan ways that you can best advantage yourself with the ever-changing tax codes.

If you want more information on this area of law, see our tax overview.