Do I have to pay taxes on winnings if online gambling on winnings of 5,000. How much would I have to pay taxes - Answered by a verified Financial Professional We use cookies to give you the best possible experience on our website. 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.

So you’ve won a jackpot on the slots or defied the odds on a sports bet in Indiana. Other than bragging on social media, one of the next things you have to do is give the federal and state governments their cut.

Winnings from all forms of gambling are taxable income, including winnings from:

• Lottery
• Slots
• Table games
• Sports betting
• Horse racing

Even if you put money down and win an organized Rock-Paper-Scissors competition, you have to pay taxes on the winnings. Even non-cash prizes like merchandise have to be reported on your federal and state income tax returns.

The idea that the Internal Revenue Service and the Indiana Department of Revenue won’t know is folly. The parties which pay out the prizes, whether that be casinos, sportsbooks, whatever, keep receipts and report them.

How much are my gambling winnings taxed in Indiana?

Effective for tax years after 2017, the federal rate on winnings over $5,000 is 24%. Winnings under that benchmark of $5,000 must also be reported depending on their amounts and sources.

Currently, Indiana’s personal income tax rate is 3.23%. Almost all gambling winnings are subject to this tax.

Casinos typically withhold 25% of your winnings for tax purposes. That is only the norm if you provide them with your social security number, however. If you decline that option, they usually withhold 28%.

How to determine if your winnings are taxable income

Another service the casinos usually provide for mutual benefit is sending you the appropriate paperwork. Fortunately, Indiana allows you to fill out the same form for both purposes.

Form W-2G, Certain Gambling Winnings reports your winnings for the year to both the IRS and you, in case you haven’t been keeping track.

The amount on this form will include any winnings from the year which qualify for federal taxes. That total will consist of:

• Your winnings (not reduced by the wager) of at least $1,200 from a bingo game or slot machine
• The winnings (reduced by the wager) of at least $1,500 from a keno game
• Your winnings (reduced by the wager or buy-in) of at least $5,000 from a poker tournament
• The winnings (except winnings from bingo, slot machines, keno, and poker tournaments) reduced, at the option of the payer, by the wager are $600 or more, and at least 300 times the amount of the bet
• Your winnings that are subject to federal income tax withholding (either regular gambling withholding or backup withholding)

How to report your gambling winnings to the IRS

The IRS requires you to report the total of your all qualifying gambling winnings for the year on a Form 1040. If you get the W-2G from the payers of your winnings, it’s a simple process of adding up those winnings and the amount of tax they withheld and then transferring those totals onto the 1040.

Add up all the numbers from Box 1 on the W-2G forms and separately, calculate the sum of all the numbers from Box 2. Place the Box 1 total on line 21 of the 1040 and place the Box 2 sum on the line designated as federal income tax withheld.

Even if the game operator didn’t do its job and you didn’t receive a W-2G, that doesn’t mean you’re off the hook.

You are still required to report all your gambling winnings from the year on the form 1040. To do that, fill out Schedule 1 with your gambling winnings as “Other Income.” Attach that to Form 1040 and include it in your personal income tax return.

So what if you weren’t flying solo, but pooled your resources together with others to maximize your chances of winning it big? That doesn’t change much.

Paying taxes on a shared prize

The IRS is prepared for this scenario. Form 5754is your go-to.

This is the form to use when you receive gambling winnings, not in your name on a W-2G. This form is also appropriate when you’re part of a group of two or more people sharing winnings.

The important thing to remember is that Form 5754 should not be included in your income tax return. Fill it out and give it to the person who received the W-2G.

Keep a copy for your records. The person who received the initial W-2G should submit all the appropriate 5754s back to the casino so they can correctly record the transaction.

The casino will then send each person their own W-2G. From there, the process is identical to how you would report any individual winnings.

How to report your gambling winnings to Indiana

As previously stated, Indiana is a state that allows you to use Form W-2G for your state income tax return as well. To do so, transfer the amount from Line 7 of your Federal 1040 to Line 1 of your IT-40.

If all or part of your winnings came while you were outside of the Hoosier State, you still must report them. That includes winnings from multistate lotteries. Report them just as you would if they came from an in-state game.

There is one legal way to reduce your tax liability from gambling winnings. It only applies if you opt to itemize your deductions, however.

Indiana and IRS gambling deductions for taxes

The IRS does allow a deduction for gambling losses. It cannot be claimed if you take the standard deduction on your return, however.

For those who itemize, gambling losses go on Line 28 of Schedule A, Form 1040. You cannot claim a deduction larger than your reported winnings.

And just because you deposit more than you withdraw from your bank account is not necessarily sufficient evidence. You must prove your losses.

You also cannot deduct expenses incurred along the way. The cost of your hotel and meals are just part of the necessary out-of-pocket expense.

If you opt to itemize and claim gambling losses, you’re better off keeping the following for your records:

• The date and type of each wager
• Where you placed the bet, i.e., the name of the casino
• How much you won or lost
• Wagering tickets
• Canceled checks
• Credit card records

Casinos can make this easy for you as well. If you’re part of their rewards programs, getting an annual summary of your gambling losses is quite simple.

The same goes for any winnings from the latest gambling option, legal sports betting in Indiana.

Taxes on sports betting winnings

With legal sports betting new to Indiana, there are plenty of people betting on college football and the NFL. Your parlay on Notre Dame football or Purdue football games is also taxable income if it exceeds $600. It doesn’t matter whether you placed your wager at an Indiana online sportsbook, inside a casino, on a kiosk at an off-track betting site or on your phone from your couch.

Just like other types of gaming operators, the book you placed your bet with should send you a W-2G. You can use that to report your winnings and withholdings to both Indiana and the IRS.

The positive side of that is just like any other gambling losses; the money you lose betting on sports can be deductible if you choose to itemize. Just as with any other deductions you claim, keeping detailed records is essential.

With any money that is deemed income by the IRS, it’s important to know what your specific tax bracket is to avoid underpayment. The highest federal tax rate is currently 35%, and that’s in addition to the 3.23% you would owe the state on your sports betting winnings.

As most operators only withhold 25% of winnings automatically, you may owe additional federal tax above and beyond what the operator withheld based on your personal income. That amount would be due upon filing.

Do I Have To Pay Taxes On Online Gambling Winnings 2019

That applies equally to those who play casino games in person and online in the Hoosier State.

Taxes on online casino games and online poker

While online poker and online casinos have yet to be legalized, when they do, taxes will work the same as they do at land-based casinos.

The operators of the games should send you a W-2G summing up all your winnings from the year once they reach certain thresholds depending on the type of game. Those are:

• Your winnings (not reduced by the wager) of at least $1,200 from a bingo game or slot machine
• The winnings (reduced by the wager) of at least $1,500 from a keno game
• Your winnings (reduced by the wager or buy-in) of at least $5,000 from a poker tournament
• The winnings (except winnings from bingo, slot machines, keno, and poker tournaments) reduced, at the option of the payer, by the wager are $600 or more, and at least 300 times the amount of the bet
• Your winnings are subject to federal income tax withholding (either regular gambling withholding or backup withholding)

With the W-2G in hand, you have what you need to report your winnings and pay any applicable taxes to both the state of Indiana and the IRS. Let’s review all the pertinent information that is relevant regardless of where your winnings came from:

• The gaming operator you placed your wagers with should send you a W-2G
• You can use the W-2G to report your winnings on both your federal and state taxes
• How much federal tax you pay depends on your personal income
• The Indiana rate is 3.23%
• If you don’t get a W-2G, you still have to claim your winnings as income if they qualify
• You can deduct your losses on your federal return, but you must itemize
• If you do go that route, keep any and all records from the transactions

With those simple things in mind, you too can stay safe from tax fraud while gaming in Indiana. Enjoy the games!

Do I Have To Pay Taxes On Online Gambling Winnings Real Money

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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®.

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).

1. 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.
2. 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.

Do I Have To Pay Taxes On Online Gambling Winnings

“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.”

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.

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.

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