Betting on the Super Bowl is an American pastime. It’s also the biggest gambling day of the year, whether the bets are formal, workplace pools, or just friendly wagers.
Nobody wants to be the bearer of bad news, but your clients who were lucky enough to bet on the Green Bay Packers – or otherwise win money on the big game – should know they are supposed to save a cut of those winnings for the Internal Revenue Service.
Gambling winnings that exceed $5,000 are subject to federal tax at 25 percent, plus any state taxes that might apply in the bettor's state, according to tax law. For winnings of at least $600 won through a formal gambling outlet like a casino, the payout likely will be made net of 25 percent withholding. Winners who refuse to provide their Social Security numbers in an effort to do an end run around the IRS may find themselves subject to a 28 percent withholding.
When money is won through a gambling institution, the winnings likely will be documented with a W-2G form. IRS instructions for W-2G forms specify that the form must be issued to those who have:
- $1,200 or more in gambling winnings from bingo or slot machines
- $1,500 or more in proceeds (the amount of winnings minus the amount of the wager) from keno
- More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament
- $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments) and the payout is at least 300 times the amount of the wager
- Any other gambling winnings subject to federal income tax withholding
However, your clients should know that they are not off the hook if documentation does not exist. Taxpayers are responsible for claiming money won in office pools and other venues on their own Form 1040, Line 21.
Bettors who lose money and itemize their tax returns can report losses up to the amount of the winnings as miscellaneous itemized deductions. The losses are reported on Schedule A, Line 28, and are not subject to the 2 percent limit. In any case, net losses from gambling are not allowed.
While the Super Bowl is an exciting time for many Americans, football wagers highlight a persistent problem within the walls of the IRS in the form of tracking and taxing gambling winnings. The tax agency faces a daily challenge of getting people to realize that gambling winnings – legal or illegal – are taxable.
Formal bets, workplace pools, and wagers among a few friends are all taxable. And gambling income is not limited to cash winnings. It also includes the fair market value of prizes, like cars and trips.
Of course, a large number of people probably know or suspect that money they won through gambling is taxable, yet they choose to ignore that fact. Your tax clients may roll their eyes when you remind them that the $100 they won in the Super Bowl office pool is taxable.
You can give them good advice by suggesting they keep a record of all gambling winnings and losses in case they are ever questioned by the IRS. Acceptable records might include a written log with details of the wager such as the date, location, amount of the bet, type of gaming, and the wins and losses. Also, it’s a good idea for them to keep lottery tickets and bingo cards as further proof.
Despite a common misconception, the same basic rules apply to online gambling. Research firm Christiansen Capital Advisers estimated that in 2005, online gambling attracted approximately 23 million people (8 million of whom were Americans) and generated approximately $12 billion in revenue, according to a report on FoxBusinessNews.com. By 2010, that revenue was expected to leap to roughly $24 billion.
With numbers like that, it’s easy to see why the IRS wants its cut.