By Yosefi Seltzer
Legal Assistance Attorney
With the opening of the MGM Grand Casino in Prince George’s County, the state of Maryland now has six casinos that offer a variety of gambling opportunities.
Like all other sources of income, gambling winnings are reportable and taxable, which means Uncle Sam will get a share of your winnings. The tax laws apply, regardless of whether the gambling winnings originated from foreign countries, a Native American reservation, the internet or illegal gambling.
Remember, Chicago gangster Al Capone was convicted for evading income taxes due on his illegal income-producing activities — not the underlying criminal acts.
Gambling includes all sorts of activities such as horse-racing bets, table games, slot machines, raffles and lotteries.
In addition to cash winnings, the IRS requires you to report the fair market value of prizes such as cars, houses and other non-cash awards.
Gambling winnings are reported as other income on Line 21 of the Federal 1040 tax return. If you itemize your deductions, you can deduct gambling losses you had during the year on Schedule A, line 28 but only up to the total amount of your winnings.
You are prohibited from simply reporting the difference between gambling winnings and losses. For example, if you won $1,000 but wagered $400, you cannot simply report $600 in winnings. You must report $1,000 in winnings and report $400 on Schedule A, line 28.
If you are in business as a gambler, you will utilize Schedule C to report income and expenses. But remember, casual gamblers cannot claim “business expenses” such as travel, hotels and restaurants when they visit a casino.
If the state lottery prize is paid in installments over multiple years, rather than a single lump sum, you must include the annual payment and any amounts you receive designated as interest on the unpaid future payments in the tax year in which you receive them.
If you sell future lottery payments for a lump sum, you must report the amount you receive from the sale as ordinary income on Form 1040, line 21 in the year you receive the lump sum payment.
Income tax is automatically withheld if the winnings exceed $5,000 for sweepstakes, poker tournaments, the lottery and any other wager where the proceeds are $600 or more and the payout is at least 300 times the bet, at the 25 percent rate.
Winnings from slot machines, Keno and bingo are not subject to withholding, although the payer of gambling winnings must issue an IRS Form W2-G if the winner receives $1,200 or more from bingo or slot machines or $1,500 or more in winnings (reduces by wagers) from Keno, in addition to the winnings described earlier.
The amount of the winnings, along with the withholding taxes paid at that time, will appear on the W2-G that you will use to prepare your tax returns. The gambling establishment will provide a copy of the W2-G after you sign the form and return it to them.
If there are multiple winners, they must complete IRS Form 5754 and submit it to the payer, who will prepare individual W2-G forms for each winner.
The IRS requires gamblers to keep a diary or similar record of their losses and winnings. The diary must contain the date(s) and type of wager of wagering activity, the name and address of the gambling establishment, names of other persons present at the establishment and amount won or lost.
The W2-G typically reports most of this information to the gambler.
In Maryland, if you receive winnings from Maryland lottery games, racetrack betting or gambling, you must pay income tax on the prize money. This would apply if you were either a resident of Maryland or a nonresident.
If winnings total more than $5,000, Maryland income taxes will automatically be withheld.
If prize money totals between $500 and $5,000, you must file Maryland Form 502D and pay the tax on that income within 60 days from the time you receive the prize money.
If you win less than $500, you don’t have to file Form 502D, but you still must report the winnings and pay tax on it when you file your income tax return.
If you fail to pay the required estimated taxes due or report income, you could be subject to penalty and interest charges.
When it comes to gambling, the old adage of “The House always wins” can be adapted to “When you win at gambling, Uncle Sam always wins his fair share” in the form of income taxes.
To discuss personal legal questions, call the Legal Assistance Office at 301-677-9504 or 301-677-9536 to schedule an appointment.