Gambling has grown in popularity, with sports betting now a national pastime for many (even if it’s
not fully legal in Washington State
, yet). With more individuals using online platforms and apps or traveling to states where gambling is legal, significant winnings are becoming a regular occurrence.
For some, gambling has even turned into a full-time career. Whether you win big locally or elsewhere, it’s essential to know how the IRS views your gambling income and what steps to take to stay on top of potential tax obligations. You need to be prepared in the event of an expensive tax bill that you didn’t expect .
How Are Gambling Winnings Taxed?
Gambling winnings are considered taxable income and must be reported on your federal tax return. This includes earnings from lotteries, casino games, horse racing, sports betting, and even online platforms. The IRS requires gambling establishments to issue a Form W-2G if your winnings meet specific thresholds—for example, $1,200 or more from slots or $5,000 or more from a poker tournament. However, even if you don’t receive this form, you are still obligated to report all gambling winnings.
Gambling income can push you into a higher tax bracket, increasing the amount of taxes owed on other sources of income. While you can deduct gambling losses, they are only deductible up to the amount of your winnings and require detailed documentation to support the claim. For those who gamble frequently, meticulous record-keeping is critical to ensure that you don’t pay more in taxes than you need to.
What If the IRS Sent Me an Incorrect Tax Bill?
An IRS tax bill related to gambling winnings can sometimes be inaccurate, leaving you with a higher obligation than you actually owe. This issue often arises when the IRS has incomplete information about your gambling activity. While they may have received a Form W-2G detailing your winnings, they usually have no record of your losses.
For example, if you reported no gambling activity but the IRS received a W-2G, the agency might prepare a substitute return on your behalf. These substitute returns often disregard any deductions or credits, leading to an inflated tax bill. In such cases, the IRS will send you a 90-day deficiency notice. You can correct this by filing an original return that accurately reflects your income and deductions.
Similarly, if you filed a return but did not report your winnings, the IRS might adjust your return to include the amounts on the W-2G. However, this adjustment does not consider whether you had offsetting losses. For example, if you won $15,000 but lost $18,000, the IRS would still tax you on the $15,000 unless you provide documentation of the losses. Again, you can only deduct gambling losses up to the amount of your reported winnings. Proper documentation—such as wager tickets, canceled checks, or statements from gambling establishments—is crucial to substantiate your claim.
Addressing an incorrect tax bill promptly through an IRS appeal or other action to prevent collection can save you from escalating penalties and interest. Consult a tax professional to file an amended or original return with the correct details.
Get Out of Trouble With the IRS
If you’ve received a daunting or inaccurate tax bill related to gambling winnings, there are steps you can take to resolve the issue. Consulting with a professional is the first and most important move to protect your finances and avoid severe consequences.
At Robert V. Boeshaar, Attorney at Law, we focus on helping people and businesses in Washington and nationwide navigate these situations. Book a free phone consultation today to discuss your tax concerns and find a solution to ease your mind.
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