Wednesday, April 9, 2008

Tax Tips For All You NCAA Gamblers

Gambling is a $50 billion business in this country, and the IRS must love it. Winnings are taxable and may be subject to withholding, and deductions for losses are restricted. Here are some ways to make the most of both winning and losing...

The Winners

If you are lucky enough to have had a good year at the track, casino, or other gambling venue, your winnings will have both a direct and an indirect impact on your taxes...

Direct impact. Gambling winnings are taxable as ordinary income. Even if you sell the right to collect your winnings, you get no break. The IRS says that you received ordinary income in this case -- not capital gains.

Example: Suppose that you win a state lottery payable over 25 years. After collecting your first-year share, you sell the right to your 24 other payments. The amount you get from the third party is ordinary income -- just as it would be had you received the payments directly from the state.

Casinos and other venues must report gambling winnings to you -- and to the IRS -- on Form W-2G, Certain Gambling Winnings, when your winnings are more than the following amounts...

$600 or more at one time if this is at least 300 times the amount wagered.

$1,200 or more from bingo or a slot machine (regardless of the size of the wager).

$1,500 or more from a keno game (net of the wager).

Income tax withholding: Winnings from any source are subject to mandatory withholding at the rate of 25% if they exceed $5,000 and the take is at least 300 times the amount wagered.

It's the total amount of the winnings that determines withholding. This is the case even if the purse is split between two or more winners and each winner receives less than the threshold amount for withholding.

Example: Two people buy a winning lottery ticket together for $1 and win $5,002. Withholding is required, even though each person received less than $5,000.

Caution: Watch out for increased withholding ("backup withholding"). If a winner gives a taxpayer identification number at the time of the winning, 25% will be withheld. If not, 28% will be withheld. This includes winnings from bingo, keno, and slot machines.

For noncash winnings, such as an automobile, withholding is based on the fair market value of the item. If the fair market value exceeds $5,000, there are two ways withholding on noncash items is figured...

The winner pays the withholding tax to the casino, lottery authority, or other payer. The withholding rate is 25% of the value of the item minus the amount of the wager.

The payer pays the withholding tax. The withholding rate is 33.33% of the value of the item minus the amount of the wager.

Indirect impact. Gambling winnings are reported in full on your tax return. They increase your adjusted gross income (AGI), and this can adversely affect other items on your return. It may...

  • Increase the amount of Social Security benefits subject to tax.
  • Reduce itemized deductions for medical expenses, casualty and theft losses, and miscellaneous expenses.
  • Prevent a Roth IRA conversion if gambling winnings push AGI over $100,000.

Come back for my second installment: The Losers

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