Gambling is a major part of both professional, and college football, so with that in mind I thought it would be a good idea to review the impact winning and losing can have on income taxes.
If you beat the odds against you in the casinos and in sports gambling and actually win, you will owe the U.S. Government income taxes. Gambling winnings are taxable income and are reported on your 1040.
If your winnings are large enough they may create a situation in which you would need to pay quarterly estimated taxes, not doing so would result in additional money owed in penalties and interest. How do you know whether or not you should pay estimated taxes?
- Will your withholding this year equal 100% of your previous year’s tax due? or,
- If your adjusted gross income is greater than $150,000 this year, will your withholding equal 110% of your previous year’s tax due?
If the answer to the question that applies to you is no, then you will be underpaid for the year to the IRS and taxes and penalties will apply. That is unless you pay additional taxes throughout the year as quarterly payments.
If you are like most people and you have gambling losses you don’t have a whole lot of options tax-wise. Keep these three tips in mind:
- First, you must itemize your deductions so this eliminates the majority of people because most just take the standard deduction.
- Further, you can only take the losses up to your gambling winnings. You can’t take losses greater than gambling winnings and use them to offset income or other types of gains like capital gains on investments.
- Finally, it is important that you keep great records if you plan on taking gambling losses. The IRS will want to see all of your losses and winnings for the taxable year.
There are special rules for those few “professional gamblers,” including the ability to deduct expenses resulting from a business. These include things like travel, food, etc… These gamblers are viewed by the IRS as running a business and will file a Schedule C. A great article describing the ins and outs of taxes and professional gamblers can be found HERE.
Paying income taxes on illegal gambling, like betting with your local bookie, will not make it legal, but at least the IRS won’t be the ones to take you down.
It goes without saying that you shouldn’t gamble a penny more than you can afford to lose. As you have likely heard before, bet with your head, not over it.
If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.