Most Americans enjoy paying their taxes about as much as they like passing a kidney stone. Still, it’s gotta be done.
The IRS opened tax season on Jan. 23. Texans have until April 18 to file tax returns and report winnings and losses they incurred from gambling during 2022.
But exactly how does one go about doing that? And do you have to report money won in other states?
All money and prizes won are taxable income
Texans have limited options when it comes to legal gambling in the state. There are no commercial casinos in Texas, and online betting at casinos or sportsbooks is prohibited. Gamblers in Texas can visit a social club to play poker (for now), buy a lottery ticket, play daily fantasy sports or place a bet on the ponies. The one full-fledged, tribal-owned casino is tucked away near the border with Mexico, far away from Texas’ biggest cities.
Under US federal tax laws, any money you win while gambling is considered taxable income. These winnings are not limited to card games and casinos. Taxable income includes gains obtained from any of the following wagering options:
- game shows
- fantasy sports events
- poker tournaments
- off-track betting
- betting pools,
- bingo and keno
Generally, all cash winnings and the fair market value of prizes such as cars and trips must be reported.
You must keep a record of your wins and losses
The IRS expects you to maintain an accurate record of all your gambling winnings and losses. You must be able to provide receipts, tickets, statements or other records that indicate the amounts won and lost.
Gambling income is typically reported on your 1040 tax return as other income. To measure your winnings on a particular wager, use the net gain. For example, if a $50 bet at the racetrack turns into a $120 win, you have won $70, not $120.
It’s also important to keep track of your losses because they are deductible. These losses, however, must be itemized. If they aren’t and are simply categorized as standard deductions, then they cannot be deducted as gambling losses. Also, gambling losses are only deductible up to the amount of gambling winnings. In other words, you can use losses to wipe out gambling income, but you can’t indicate a gambling tax loss.
It’s prudent to save all documentation related to your gambling exploits. In fact, the IRS expects you to keep tabs on the following information related to each gambling win or loss:
- Type of gambling activity
- Name and address of the establishment or event
- Names of other people there at the time of the activity
- Amounts of winnings and losses.
Operators generally withhold taxes on big winnings
Depending on the size of your winnings, you may receive Form W-2G, which indicates the amount of tax withheld on your winnings, if any. This form is sent to you by Jan. 31 following the year in which the income was won.
Normally, a flat tax rate of 24% is held on your gambling winnings. You need a Form W-2G on the following gains:
- $1,200 or more from bingo or slot machines
- $1,500 or more from keno
- $5,000 or more from poker
- $600 or more if the earnings are at least 300 times the amount of a wager
In Texas, all gambling gains are subject to a federal tax of 24%. With Texas being one of the eight states that does not levy an income tax, you do not file a state income tax return.
Do you have to pay taxes on lottery winnings?
The Texas Lottery is the third largest in the nation, generating billions of dollars in sales every year. Lottery winnings are taxable in The Lone Star State. That goes for all kinds of prizes won, from cash to vacations. Depending on your other income and the size of your winnings, your federal tax rate could spike up to 37%.
Lottery winnings are reported as income in the year you receive them. That goes for non-cash prizes, too. With cash, if you receive the winnings in annual increments, you only report each year’s installment as income for that year.
Should you win more than $5,000 in the lottery, 24% will be withheld for federal tax purposes. You’ll receive Form W-2G showing the amount paid to you and the federal tax withheld.
It’s worth noting that since the federal tax rate can shoot up to 37%, the withholding may not be sufficient to cover your federal tax liability. During such circumstances, you may have to make estimated tax payments. Failing to do so could result in a hefty penalty.
On top of that, you may be required to make state and local estimated tax payments.
Must Texans report winnings and losses from other states?
Since gambling in Texas is still restrictive, many travel outside the state to gamble. This raises the question as to whether winnings and losses incurred in other states need to be reported. The answer is a resounding Yes.
Oklahoma, for instance, requires that a non-resident file a 511NR income tax form if they obtained a gross income of $1,000 or more in that state. You may be wondering if gambling winnings are considered Oklahoma source gross income. Again, the answer is yes. Income received from all sources of “wagering games of chance” or any other winnings from sources within Oklahoma is subject to tax.
Louisiana, another neighboring state Texans often travel to for gambling purposes, has similar stipulations. Besides reporting your winnings on your federal tax return, you will also have to pay Louisiana state income tax.
A non-resident who received gambling winnings from Louisiana sources and who is required to file a federal income tax return must also file a Louisiana return showing the winnings earned.
In short, if you go play out of state, appraise yourself of that state’s tax reporting requirements.
Reporting wins and losses from illegal/offshore betting sites
For Texas residents, betting on offshore sites is not clearly illegal though the sites themselves are illegal.
And if money is won during these gambling ventures you are obligated to report that income on your tax return, regardless if you used a legal or illegal offshore site.
That’s because the government is less concerned with where you got the money – from a tax perspective – than where you live.
Under the Internal Revenue Code, income for US citizens is taxable, whether it’s earned in the US, overseas, or online. Furthermore, section 61(a) of that code defines gross income as “all income from whatever source derived,” including gambling, unless otherwise provided.
So if you live in Texas, it’s important to not fall prey to the misconception that money won at an offshore gambling site need not be reported simply because it’s overseas.