Can Gambling Winnings Be Taxed
- Because lottery winnings are considered gambling winnings, which are definitely considered taxable income, the IRS will want its cut. For lottery winnings, that means one of two things. You’ll either pay taxes on all the winnings in the year you receive the money — for winnings paid out as a lump-sum payment.
- If you receive your winnings through PayPal, the reporting form may be a 1099-K. The 1099 tax forms report your winnings to the taxing authorities and also gives you notice of the amount you must report on your taxes. Even if you don't receive a 1099 form, you must still report the net profits on your federal and state income tax returns.
For many of us, gambling means buying the occasional lottery ticket on the way home from work, but the Internal Revenue Service says that casual gambling also includes raffles, casino games, poker, sports betting—and, yes, even fantasy football. When you win, your winnings are taxable income, subject to its own tax rules.
So you’ve managed to beat the oddsmakers at a Tennessee sportsbook? Or perhaps you’ve hit it big playing Mega Millions, Powerball or another Tennessee Lottery game?
Not to rain on your parade, but the IRS considers any gambling winnings taxable income. This includes cash and material prizes such as boats and cars.
According to federal law, you must report your winnings on your federal tax return for the appropriate year. This is especially crucial for Tennesseans now that online sports betting is legal.
Tennesseans might have many questions related to gambling and taxes. These might include how to report your winnings to the IRS, along with what rate the IRS taxes those winnings at.
Fortunately, it isn’t that complicated. The IRS has clear procedures in place for how to handle such instances. When you know those procedures, you can rest assured that you’re compliant with federal laws.
Sportsbooks and the Tennessee lottery can help you out in this regard as well. They also have to follow federal and state reporting procedures, so their protocols can make the process of reporting winnings even easier for players.
Here are your obligations under federal and state laws if you’ve successfully gambled in Tennessee.
How much will the IRS tax my gambling winnings?
Effective for tax years after 2017, the federal withholding rate for gambling winnings of $5,000 or more is 24%. That’s a cumulative amount for the entire year, so even if you win $1,000 on five or more separate occasions during the year, you still need to report your winnings.
Sportsbooks and the Tennessee lottery typically withhold 25% of your total winnings for tax purposes. That’s only if you provide the sportsbooks with your Social Security number, however.
If you choose to withhold your SSN from sportsbooks, they typically withhold 28% of your winnings. Sportsbooks need your SSN to accurately report their business dealings to the IRS.
Tennessee has no state earned income tax. Your winnings may be subject to the Hall Income Tax, however, for the 2020 tax year and prior years.
It really depends on how you use those funds. The state doesn’t consider your lottery and sports betting winnings themselves taxable income, but if you use the money to produce certain kinds of dividends and interest, the state may tax those dividends and interest.
There are many exceptions to the taxable dividends and interest list, such as interest paid on personal savings accounts. The Hall Income Tax sunsets completely on Jan. 1, 2021.
For 2020, the rate is 1%.
The IRS has a form specific to reporting gambling winnings. That’s where the Tennessee sportsbook apps and the Tennessee lottery can be of the greatest assistance to you.
Federal form W-2G, certain gambling winnings
The IRS puts the burden of sending out the W-2G on the organization that pays out winnings. If you win any cash or prizes this year, you should get a W-2G from that entity in plenty of time to file your federal taxes.
Fortunately, there’s nothing you need to do to the form. Do not include it in your IRS filing. You will need it when you file your federal income tax return, however. You should keep a copy for your own records for at least five years.
If your winnings reach one or more of the following thresholds, you should get a W-2G from the sportsbook you won with or the Tennessee lottery. Each entity you successfully gambled with will provide you with a separate W-2G.
Those federal thresholds are:
- Winnings of $1,200 or more from a bingo game or slot machine
- Winnings, minus your wager, of $1,500 or more from a keno game
- Winnings, minus your buy-in or wager, of more than $5,000 from a poker tournament
- Winnings of $600 or of a value at least 300 times the buy-in/wager or more, except those from bingo, keno, poker tournaments and slot machines
- Winnings that are subject to federal income tax withholding for any other reason
What if I don’t receive a Form W-2G?
If you’re a legal US citizen or resident, you must report your eligible gambling winnings on your federal earned income tax returns regardless of whether you receive a Form W-2G or not.
Contact the sportsbook operator or the Tennessee lottery if you need a W-2G and don’t receive it in a timely manner, there may have been an error.
If you still can’t get a W-2G, use Form 1040, Schedule 1 to report your winnings. Use the “Other Income” section to denote the value of your cash and material prize winnings.
Include that form with your other documents in your IRS filing for the appropriate year. There’s one more step you need to take even if you do receive a Form W2-G.
How to report winnings on your federal income tax return
The IRS requires you to report your gambling winnings on Form 1040, Schedule T, Line 8. If you do get a Form W-2G, this is a very simple process.
Since you are reporting your gambling winnings from all sources, gather up all your relevant W-2G forms (if you have more than one). If all your winnings came from a single source, this process is even easier.
Simply transfer the amount in Box 1 on your W-2G form to Line 7a of your 1040. If you received more than one W-2G, you will need to add up all the amounts in Box 1 on all the forms and then put that total in Line 7a of your 1040.
The same process applies if there is an amount shown in Box 2 on your W-2G forms. Include that amount in your total federal income tax withheld on Line 17 of your 1040.
This is the correct procedure for reporting gambling winnings for an individual. If you’re part of a group that won a cash or material prize, the process is a little different.
What if I’m part of a group of people that wins a cash prize?
If you and several of your co-workers pool resources to buy lottery tickets and win, or you go in with a couple of friends on a big sports wager, the IRS still considers your winnings taxable income. There’s a form just for these occasions.
That’s Form 5754. The sportsbook and/or the lottery use this form to prepare the W-2G when a group of people wins a prize, or the person receiving gambling winnings isn’t the actual winner.
The sportsbook or the lottery should send you a blank copy. The onus is on you to accurately fill it out and return it to the party granting the prize. They need it for their tax records.
Just like the W-2G, you shouldn’t include this form in your federal tax return. You should keep it for your own records, however. The minimum recommended time to do so is five years.
Are gambling losses tax deductible?
You can deduct your gambling losses. You must itemize your deductions in order to take advantage of that allowance, however. The IRS does not allow you to deduct more than you win in a tax year or deduct your expenses incurred while gambling.
Just like with any other deductions you claim, you should keep all relevant paperwork for a period of at least five years. This includes:
- Receipts for your wagers that denote the date and type of bet
- The name of the sportsbook or the location where you bought a lottery ticket
- The amount lost or won
- Wagering tickets
- Debit card records
- Bank statements
- Canceled checks
Many sportsbooks keep a running account of your activity in your account profile. This can make it easy to identify your total losses for the year and see if it would be worthwhile to itemize your deductions and report them.
Remember, deducting your losses isn’t a matter of subtracting your losses from your winnings and then simply reporting what’s leftover. You must report all your qualified winnings to the IRS regardless of any losses you suffer.
What if I win a Mega Millions or Powerball jackpot?
The IRS considers cash or material prizes won playing multi-state lotteries as taxable income. You would report such prizes using the same methods as if you won a prize playing a Tennessee lottery game.
The same goes for if you claim winnings in Tennessee but maintain your legal residence in another state.
Are Winnings Taxable
The process of reporting the value of non-cash prizes is somewhat murky, however.
The IRS does supply a definition of the “fair market value” of material prizes. That is, “the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts.”
The IRS does not supply a formula to determine that value, however. You will have to check out the going rates for similar items in your area to determine the fair market value for your material prize.
Once you’ve determined that, you need to include that with your winnings for the year on your Form 1040. If you’re unsure of how to value your prize, this is where contacting the IRS may be beneficial.
Online sports betting and taxes
The IRS makes no differentiation between winnings won in-person or online in terms of gambling. Additionally, the IRS considers sports betting winnings taxable income.
You must report all your qualified sports betting winnings, whether they came through online or retail channels, to the IRS. The general rule of thumb is to report your winnings once you hit the threshold of $600 or winnings of 300 times the amount you have wagered in a tax year.
The sportsbook should send you a Form W-2G. This will make it easy for you to report your winnings on Line 7a of your Form 1040 for the IRS.
Tennessee is among the best states for gambling purposes, as the state does not tax your winnings in most cases. Following this advice, you can fulfill your federal obligations and enjoy the remainder of your winnings.
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Hit it big playing the lottery? You’re probably thinking about how you’ll spend all that sweet cash. But first, Uncle Sam is going to want his cut.
The Internal Revenue Service considers lottery money as gambling winnings, which are taxed as ordinary income. The total amount of tax you pay on your lottery winnings will depend on multiple factors, including the state where you live and whether you take the winnings as a lump-sum payment (one check for the full amount after taxes have been withheld) or an annuity (smaller annual payments that are paid out and taxed over time).
Although you probably won’t be able to completely escape the tax man, you may be able to offset taxes on lottery winnings by claiming deductions you qualify for. Here are some things to know about paying federal income taxes on lottery winnings. Keep in mind tax rules may vary for state and local income taxes, so for the purposes of this article, we’re talking about federal income taxes only.
Do I have to pay taxes on lottery winnings?
The IRS considers most types of income taxable, unless the tax code specifically says it’s not. Because lottery winnings are considered gambling winnings, which are definitely considered taxable income, the IRS will want its cut.
For lottery winnings, that means one of two things.
- You’ll either pay taxes on all the winnings in the year you receive the money — for winnings paid out as a lump-sum payment.
- Or you’ll pay taxes only on the amount you receive each year — for winnings paid as an annuity.
Take note: If you receive interest on annuity installments that haven’t been paid to you yet, that interest must be included in your gross income for the tax year you received it.
How will the IRS know about my lottery winnings?
If your winnings are $600 or more, the lottery agency is supposed to give you a Form W-2G that you’ll have to file with your federal income tax return if the agency withheld federal income tax from your winnings.
The lottery agency is also required to send a copy of this form to the IRS if your winnings are $600 or more, so it’s important to accurately report your winnings on your federal tax return.
And even if you don’t receive a W-2G for your lottery winnings (or other type of gambling payouts), you’re still expected to report those winnings as income on your federal tax return.
How could winning the lottery affect my taxes overall?
Getting a huge financial windfall can be life-changing, but it doesn’t change everything — you’ll still have to pay taxes and bills. Federal and state taxes can decrease the amount of money you ultimately receive, so it’s crucial to understand taxes on lottery winnings when you strike it big.
Whether you’re all-in on your prize money and accept it as a lump sum or you’re receiving payments over time, winning the lottery generally increases your income. Taxes are calculated based on your taxable income for the year, so if the extra income from lottery winnings moves you into a higher tax bracket, you’ll typically end up paying more income tax.
If you fail to report taxable income (including lottery winnings) on your tax return, you could owe additional tax, interest and even penalties.
What is the tax rate for lottery winnings?
Depending on where you live, you may need to pay taxes on lottery winnings to your state and local governments in addition to the federal government.
Federal tax
Right off the bat, lottery agencies are required to withhold 24% from winnings of $5,000 or more, which goes to the federal government. But, depending on whether your winnings affect your tax bracket, there could potentially be a gap between the mandatory withholding amount and what you’ll ultimately owe the IRS.
Even if your lottery winnings don’t boost your tax bracket, if the federal government withheld too much tax on your lottery winnings, you might get a refund at tax time.
State and local tax
Each state has its own rules on taxing lottery winnings, so check both your state’s tax website and your city’s tax website for information. For example, if you live and win in New York City, the state government will withhold 8.82% and the city will withhold another 3.876% — on top of your base federal withholding of 24%.
Seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — don’t have income tax, so big winners in those states won’t pay state taxes on prize money. Some other states don’t have a state lottery at all.
And three more states — California, New Hampshire and Tennessee — exclude their state lottery winnings from taxable income. But before you play the lottery in a different state, check the rules so that you know whether any taxes will apply to your winnings.
Should I take a lump sum or annuity payments?
Whether you get to choose between a lump sum or annual installments for your lottery payout can depend on different factors, like state lottery rules and how much you won. Either way, here’s how the two payout types will affect your federal income taxes.
Lump-sum impact
Receiving your winnings as a single lump sum could potentially bump you right into the highest bracket for the tax year in which you win the lottery. That would mean if you win a very large amount, your income over a set threshold ($518,401 for single taxpayers and $622,051 for married couples filing jointly, for 2020) would be taxed by the IRS at 37%.
“If you decide to have a lump sum payment, that would probably put you in the higher tax bracket for that one year,” says Megan McManus, CPA and owner at Megan McManus, CPA.
For example, if you’re single and your current taxable income is $40,000, a $1 million lottery payout, taken in a lump sum, would increase your total income to $1,040,000 for the tax year. At the federal level, the portion of your income over $518,401 would be taxed at 37%. But all the lower tax rates would also apply to portions of your income less than that threshold. Here’s what you’d pay (rounded to the nearest dollar).
- 10% on income up to $9,700 = $970
- 12% on the next $29,775 = $3,573
- 22% on the next $44,725 = $9,839
- 24% on the next $76,525 = $18,366
- 32% on the next $43,375 = $13,880
- 35% on the next $306,200 = $107,170
- 37% on the last $529,700 = $195,989
If you add all that up, your total federal income tax obligation for the year would be $349,787.
Annual payments impact
Depending on your income, receiving annual payments will also likely affect your tax bracket — but the immediate financial impact could be less.
“The annuity payments would probably allow you to be in a lower tax bracket each year,” McManus says.
Let’s look at the above scenario with the same amount of lottery winnings broken out into 30 annual payments of about $33,333.
With the annuity approach, your taxable income would increase to just $73,333 in the year you won the lottery (assuming other factors like a wage increase didn’t boost your taxable income). The highest federal tax rate that would apply to your income would be just 22%. Here’s what you’d pay (rounded to the nearest dollar).
- 10% on up to $9,700 = $970
- 12% on the next $29,775 = $3,573
- 22% on the remaining $33,858 = $7,449
Your total federal income tax obligation for the year in which you win would be just $11,992.
Learn more about the marginal tax rate and what it means for your winnings.
How can I offset federal taxes on lottery winnings?
If you’ve won the lottery, the IRS expects you to report it as income on your tax return. And Uncle Sam is going to want his share whether you receive your winnings as a lump sum or annual payments. But there are ways to try to offset the increased tax obligation your lottery winnings will cause.
Claim deductions
Deductions are dollar amounts the IRS allows you to subtract from your adjusted gross income, or AGI, if you meet the requirements. This lowers your taxable income, which in turn can reduce your tax obligation. Here are two possible deductions (if you itemize).
- Charitable donations — You may be able to deduct the value of your charitable contributions from your income as long as the organization is a qualified tax-exempt organization — but certain conditions and limits apply. For example, you can only deduct cash donations that are equal to no more than 60% of your AGI.
- Gambling losses — You can deduct your gambling losses (like the cost of lottery tickets that you didn’t win on) as long as they don’t exceed the winnings you report as income. For example, if you report $1,000 in winnings but you have $2,000 in losses, you can only deduct $1,000.
Play the lottery in a pool
If you join a pool with others to buy lottery tickets, then any potential lottery prizes will be smaller because you’re sharing it — but your tax hit will be smaller, too.
“You’ll only be taxed on your portion of the income,” McManus says, “so if you receive a third of the winnings, you would only pay tax on that third.”
Can Gambling Winnings Be Taxed Online
To make sure you’re taxed correctly, document how much of the winnings go to each person in your group. Ask the lottery agency to cut checks for each person in the pool instead of having one person collect and distribute the winnings. This may help ensure you only pay taxes on the amount you actually receive.
What’s next
Winning the lottery could change your life by giving you a certain level of financial freedom. But before claiming your prize, consider speaking with a financial or tax adviser who can help you understand the potential tax impact of your winnings and plan the best way to manage your windfall.
Paying Taxes On Gambling Winnings
Consider how you plan to use the money.
“If you want to buy a house or put your kids through college, you might need the funds now, as opposed to taking annual payments,” McManus says.
But if your objective is to ensure a steady stream of income, annual payments may be more appealing to you.
Whether you receive your lottery winnings as a lump sum or annual payments though, you’ll still have to pay the federal government — and possibly your state and local government — their share of your winnings. So it’s important to have a plan for how to best save, invest and grow the winnings you’ll keep.
Relevant sources: Topic No. 419 Gambling Income and Losses IRS: Publication 538 New York Lottery General Rules IRS: Pay As You Go, So You Won’t Owe
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.