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Tax Rules Differ for Foreign Gamblers

Jul 20th 2015
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So here's a fun tax question, given the amount of travel this time of year, (particularly those traveling to the U.S. from other countries) how do you account for income tax withholdings for taxes on various kinds of income, including gambling winnings, received by a nonresident alien?

Let's start with this scenario: I'm a Canadian citizen and live in our capital, Ottawa. Last month, I went on my first visit to the United States, a 10-day stay, part of which was in Las Vegas, where I won $20,000 at a casino. To my dismay, I left the casino without all of my winnings, the $20,000 having shrunk to $14,000 after the casino withheld $6,000 for US income taxes.

I contacted the U.S. Embassy in Ottawa. The person with whom I wound up speaking said the way to recover the $6,000 is to contact some agency known as the Internal Revenue Service, which, the staffer assured me, is renowned for its prompt, understandable and helpful responses to inquiries.

According to some of my U.S. friends, that might not always be so, which is why I thought it prudent to get advice from someone like you, who has no connection with the IRS. Should I hire a tax professional to prepare a refund claim? If yes, how do you rate my recovery prospects?

Answer: Unfortunately, less than zero. With your scenario, you get nothing back. As someone from outside of the U.S. who briefly vacations here, you come under a special set of tax rules for a nonresident alien – an individual who is neither a US citizen nor an alien who resides in the United States.

IRS regulations specify how much to withhold for income taxes on various kinds of income, including gambling winnings, received by a nonresident alien. Generally, those regulations require a casino, such as the one you visited, to withhold at a rate of 30 percent of your winnings.

There's a limited exception to this requirement, but it provides no relief for you. For the regulations to be superseded and the exception to apply, the US-Canada income tax treaty has to permit withholding of income taxes at a less-than-30-percent rate or, as might be the case, no withholding at all, that is, a complete exemption from taxes. Nowhere does that treaty authorize an exception to the usual rule that compels 30 percent withholding by a US casino on the full amount of gambling winnings received by a Canadian.

My advice would also not differ had you suffered any gambling losses during your visit to the U.S. According to IRS guidelines: “You must report the full amount of your winnings. You cannot offset losses against winnings and report the difference.” Result: No recovery of the $6,000, even if your losses are sufficient to offset your winnings of $20,000.

As it happens, there's a different, more favorable, set of rules for someone who is a US citizen or an alien who resides in the United States. Those rules similarly tax gambling winnings. However, gambling losses are deductible up to the amount of winnings, a relief provision that, as I explained, is unavailable to someone like you.

Understandably, odds are that you are unlikely to appreciate the appropriateness of that distinction. Moreover, you might even be inclined to view the rules for foreign tourists as an example of governmental rapacity on the part of the United States.

About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from “Julian Block's Year Round Tax Strategies,” available at julianblocktaxexpert.com.

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By Reg Ealey
Jul 10th 2017 17:03 EDT

Mr. Block,
From the experience I have had with the IRS, I do not agree with your answer.
As a Canadian Citizen you can claim your losses, BUT, in order for the person inquiring to recover ALL of the Tax withheld, AFTER jumping through ALL of the hoops your Government has set up, primarily, I think, to discourage people from initiating the recovery process, the biggest hurdle is the statement of or, VERIFICATION of losses.
As a Canadian, I do not keep a record of my losses, (though I did keep a journal one year and at the end of the year was embarrassed at what I had spent on Casino visits, Lotteries and other "Chance" expenditures.
As a US Citizen and someone giving advice on US Tax Law, so familiar I would think, with a 1040 NR, Line 10 on Page 4 reads:

Gambling- Residents of Canada only. Enter NET income in Column (c)
If zero or less, enter 0
a. Winnings
( Our friend) $20,000
b. Losses Not known

The difference is the amount that would go in Column c

The sad part is that not many Canadians keep track of their losses because we don't pay taxes on gambling winnings.
It is important to note that the losses are all losses in the same taxation year as the winnings, not only at the time of the taxable winnings.
As a result many are blind sided by the amount withheld by the IRS on gambling winnings at a US Casino.
Almost as difficult is getting information on gambling losses as my understanding is that if you use a Player's Card, it records your wins and losses and you can request that information from the Casino.
They (The IRS representative at the Casino or the Casino Representative) ( Collusion??), do not provide you with that information or give you much information on how to recover the tax withheld when they bring you the winnings.
As a result many people never initiate the recovery process and I respectfully submit that after reading your reply, as a Canadian, I would not either.
I initiated the process in 2013 to help a friend recover money withheld from her winnings in Dec. 2011.
Unfortunately a filed a 2012 1040NR in March 2013 and the IRS never noticed it.
The IRS changed her name, did not recognize her S.I.N. and mis-sent a letter advising an ITIN had to be obtained.
The file was resurrected in 2015 by a call to the IRS, as a Representative and even though my designation as a designee had expired, was kind enough to have a discussion which revealed we had not received a letter sent in June 2013 advising about the requirement for an ITIN had not been received.
I put that in to show that, although some of the IRS are by the book, some also are very approachable and helpful.
Although the ITIN has been received after some difficulty completing the Form W-7.
I never really thought of my friend as an "alien " (by any stretch of the word, although she does some "far out" things sometimes, but you live with the wordings, filed the 1040NR, with a copy of the 1042S.
The only problem is we did not use line 10 a & b and can not verify the losses for line b, so it appears my friend becomes an involuntary donor to the IRS.
Hope this information may be helpful to someone else
Reg Ealey
Saskatoon, Sask Canada
1 306 715 4734

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