Texas Gambling and Taxes

Gambling in Texas may create a tax burden for you.

Although the Lone Star State is not necessarily a mecca for gambling, there are still state and federal obligations whenever Texans engage in the limited forms of legal gambling available. Horse tracks in the state and the state lottery both have tax elements as part of their offerings. Taxation as a means to collect revenue is the stated goal of the Texas Lottery.

Whether you have purchased a winning lottery ticket, won a bet on a race at Lone Star Park, or even traveled next door to Louisiana and won some money gambling, you’ll want to know exactly what your tax obligation is. Here is a primer on everything Texans need to know about both state and federal taxes on gambling winnings in Texas.

Are gambling winnings taxable in Texas? 

Yes, gambling winnings count as taxable income in the state of Texas. As the saying goes, “Don’t mess with Texas,” but when it comes to fulfilling your obligations regarding gambling winnings in the state, don’t mess with taxes, either.

Even though the majority of gambling transactions take place in cash, they are still the business of various taxing authorities in the country. Although it might be galling to consider upon returning to Texas from a trip to Oklahoma, New Mexico, or Las Vegas, you still have a responsibility to report your gambling winnings to the government.

How much federal tax do you pay on gambling winnings?

Let’s start with federal taxes and what the Internal Revenue Service expects from you if you win money gambling. Technically, the amount that you win is irrelevant, as any enrichment you receive from gambling is taxable income. You are therefore supposed to report it as such.

There are several mandatory reporting thresholds that the IRS requires from gambling facilities across the nation, and the racetracks don’t have time to send the IRS a notice every time someone wins a few hundred bucks. Be aware, though, that even if a gambling provider doesn’t report your winnings to the IRS, you are still responsible for paying taxes on those winnings.

When someone wins more than $5,000, the gambling provider (e.g., the racetrack, the Texas Lottery) will report that to the IRS. At that point, the provider also must automatically withhold 24% of the winnings before cashing you out. You will additionally receive an IRS Form W-2G as evidence of both your win and the tax you paid on it.

To be clear, the threshold is $5,000 of profit. In other words, A $1,000 bet paying 4-to-1 would not trigger the automatic withholding because even though your gross return would be $5,000, your profit would be $4,000. Remember, though, even if money isn’t withheld from your winnings for taxes at the time you collect, you’re still obliged to pay tax on your winnings.

Big winners cannot remain anonymous as they can with lower stakes. Be prepared to provide a tax identification number and two forms of ID in order to claim your winnings above the tax threshold. Your tax ID number is usually your Social Security number, but it might be good to double-check before you go shoot for the big bucks.

There are also some other specific mandatory thresholds for providers to withhold money for taxes, even if you don’t exceed the $5,000 mark. Here are the thresholds for withholding and receiving a W-2G:

  • $1,200 or more (in combined bet and profit) from a slot machine
  • $1,500 or more playing keno
  • $5,000 or more in a poker tournament
  • $600 or more when the payout is at least 300 times your wager

For the most part, you don’t have many options to trigger these thresholds in Texas. There is no legal keno in the state, and the only legal slot machines are at the Kickapoo Lucky Eagle Casino Hotel in Eagle Pass and the slots-like electronic bingo machines at Naskila Gaming outside Livingston. You can certainly win a payday of $600 or more on a $2 lottery ticket, however, so that’s an example where withholdings might come into play.

Poker winnings are a bit trickier, however, due to the explosion of poker clubs across the state. Without any official oversight, it’s uncertain when and whether these clubs might issue W-2Gs to players, even if they probably should. In fact, anecdotally, we have heard at least one club owner indicate no plans to fool with the tax ramifications of big wins.

We highly recommend that you keep records of your poker exploits yourself, regardless of whether you receive a W-2G. If you win a big tournament or play in a high-stakes game (some of which are live-streamed), it will not take a genius at the IRS to figure out that you’ve turned a significant profit.

How to report your gambling winnings to the IRS

Assuming you’ve kept an accurate and detailed record of your gambling endeavors from the previous year, you’ll need to fill out a Schedule 1 for the IRS. This form is the place to report all types of “additional income” such as alimony, real estate income, or even jury duty pay. Enter your gambling proceeds on Line 8b to include them in your total additional income. Then enter that total on Line 8 of Form 1040.

There is also a section of Schedule 1 for expense deductions, so be sure not to miss out on any of those. You’ll need to add your total deductions to Line 10 of the same form. Make sure that you attach your completed Schedule 1, whether electronically or by mail, to your return when you submit it to the IRS.

What if I don’t receive a Form W-2G?

If you visit the Lucky Eagle Casino, one of the horse racetracks in Texas, or an out-of-state casino and have to report your winnings, you are quite likely to receive a W-2G when appropriate. However, it’s not a given that you will. It might even be something as innocuous as the casino/track filing the paperwork and forgetting to give you your copy. It’s also possible that you received the form appropriately but misplaced it in the fever of your victory.

Though the form is the gambling provider’s responsibility, it is still on you to report your income accurately for taxation. Here’s what to do if you believe you’re missing a W-2G:

  1. Write down the amount and date of your win(s). Keep a record for yourself. You should keep track of all your gambling winnings, as they are all taxable income. If any winnings exceed the above thresholds, you are due a W-2G.
  2. Get in touch with the casino or track where you won. The facility should have it somewhere and can make you a copy.
  3. If that fails, reach out to the IRS. If a gambling provider issued a W-2G, the agency will have it on hand.
  4. Regardless of whether you track down your W-2G, report the income. The last thing to do is generate an audit for yourself whenever you win money while gambling. Remember (again), all gambling winnings count as taxable income.

The bottom line is that the IRS has plenty of resources to make sure that you pay your fair share, whatever it may be. It’s never fun giving money to the government, but it’s better than having the IRS “take a closer look” at your finances. Even if nothing’s out of order, the aggravation isn’t worth it.

Is there a state gambling tax in Texas?

The good news for Texans is that there is no state income tax to pay. So you don’t have to pay any state taxes on your gambling winnings.

Be aware that the state does take its share out of the lottery and horse racing bets that take place. They are folded into the house edge on these activities, and the state infuses its budget with millions from gambling every year. However, you don’t have to pay any additional income tax to the state on your winnings.

Can I deduct my gambling losses? 

Yes, although in order to do so, you cannot take the standard deduction. You must instead itemize all of your deductions.

When filing your federal tax return, you can also use Schedule 1 (discussed above) to help you calculate your gambling losses. Note that you can’t simply deduct losses from wins and report the net total. You are supposed to calculate losses separately, and you cannot count other expenses (e.g., money to pay for a trip to a gambling venue). You also can’t deduct more money than you have won (even if you have lost more than you’ve won).

In truth, only professional gamblers are likely going to want to consider deducting their gambling losses.

Do I pay taxes if I win the lottery in Texas?

 Yes. Lottery winnings are taxable as regular income just like any other type of gambling windfall. You’ll simply need to add them to your report on Schedule 1 in order to submit them for taxes. If your profit from the winnings exceeds $5,000, the Texas Lottery will withhold 24% of the payout automatically.

Make sure that you put any winnings from out-of-state lotteries on Schedule 1, too. Even if you pick up a winning lottery ticket at an airport, you’ll still need to report it when you file from home in Texas.

What happens if I win the lottery as part of a group?

For some of the bigger lottery prizes, it’s not unusual for groups of friends, family members, or coworkers to pool their money and buy a large number of tickets. In some cases, it has resulted in success, with one of the many pooled tickets containing the jackpot numbers. You might also run into this kind of question if everyone throws their money together for a trip to Louisiana or Oklahoma to play the lottery there. It’s understandable to be a bit confused about what to do tax-wise if you find yourself in one of these situations.

As is the case for almost every scenario involving money, the IRS has a form specifically for the occasion. Form 5754 is the Statement by Person(s) Receiving Gambling Winnings and facilitates the reporting of winnings shared among members of a group. The form must designate one group member as the actual recipient of the jackpot. Then, both the recipient and the other group members must fill out identification information for themselves and indicate what their share of the winnings is (in dollars).

After completion of the form, the recipient (or someone else in the group) must send Form 5754 back to the payee of the jackpot amount. In other words, you’ll need to send it to the casino, racetrack, or lottery commission that awarded you the prize. The group itself decides how to divide the winnings, though.

Do I have to pay taxes on non-cash prizes?

Yes. In fact, in some cases, you will probably need to consider the tax ramifications of the prize before you accept it.

What matters for this determination is the fair market value of the prize. Strictly speaking, the IRS doesn’t discriminate between a car worth $100,000 and a cash prize of $100,000. Both would have the exact same tax liability. When you win such a prize, you’ll either receive or need to fill out a 1099-MISC form to report the prize properly.

While that simplicity might make sense to the tax assessors, it can create a real problem if you didn’t win cash. Cash winners can pay their tax bills out of their prizes, but non-cash prize winners will have to pay the appropriate taxes out of their own pockets. If the prize you won is far more valuable than your other assets, it might push you into an uncomfortable tax bracket and end up making you regret the win.

You can take the step of selling off the prize to cover the expense, of course. However, remember that the assessed fair market value is an estimate, and the actual amount you may realize by selling could be far less. If taking on a prize is going to change your life, you might consider declining it, as the change might not be one you want. Even if you come out ahead after the sale, the headache of dealing with it may not be worth the effort.