If you’re lucky enough to win the lottery or hit a two-team parlay on your favorite sports team, be aware of the possible tax consequences that go along with your good fortune.

Review the tax rules

Whether you win online, at a casino, a bingo hall, fantasy sports, or Texas Hold ‘em tournament, you must report 100% of your winnings as taxable income. These winnings are reported on the “Other income” line of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the racetrack turns into a $110 win, you’ve won $80, not $110.

Be sure to carefully keep track of your gambling losses. If you itemize your deductions (rather than taking the standard deduction), these gambling losses are deductible up to the amount of your gambling winnings. This can help lower the gambling income reported on your 1040 (note: you cannot claim gambling losses in excess of your winnings on your tax return).

Maintain good records of your gambling losses during the year.  As the losses offset your winnings, you don’t want to lose track these deductions. Keep a journal that includes the date, place, amount, type of wager, and names of people you were with, for each gambling loss. Make sure to save all documentation, such as checks or credit slips and wager tickets.

Hitting a lottery jackpot

The odds of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.

Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on other income and the amount of your winnings, your federal tax rate may be as high as 37%. Depending on where you live, you may also be subject to home state income tax.

You report lottery winnings as income in the year, or years, you receive the cash/prizes. For noncash prizes, this would be the year the prize is received. With cash pay-outs, if you take the winnings in annual installments (i.e., not the lump sum option), you only report each year’s installment as income for that year.

If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.

The current federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. You may need to make estimated tax payments at the federal, state, and local levels – or an underpayment penalty could be assessed.

If you’re lucky enough to hit a jackpot, there are other issues to consider. This article only covers the basic tax rules. Different tax rules apply to people whose level of play (and other factors) qualify them as professional gamblers.  Please contact us with questions.  When you win big, we can help you minimize taxes and stay in compliance with all requirements.