The Kentucky Derby, horse betting and the IRS
Racing and gambling enthusiasts bragging to friends, co-workers and family about their winnings after this weekend’s Kentucky Derby should remember to tell somebody else about their winnings: the IRS. Whether it’s big or small, legal or illegal, live or remote, income from betting is fully taxable.
Some winners – and the IRS – will get a tax form
Taxpayers who win $600 or more may receive a tax form reporting the prize, a W-2G or in some cases a 1099-MISC. The IRS will compare the information on the taxpayer’s return with the tax form reporting gambling winnings. For this reason, failing to report the prize as income is the surest way to get audited.
Just because a taxpayer doesn’t receive a tax form does not make the winnings tax-free. Taxpayers still have a responsibility to report their prize on their tax return as “other income.”
Kentucky Derby winners can deduct losses
Gamblers may deduct their losses, but only by as much as they report in winnings. So if a taxpayer entered two pools – one at the office and one among friends – at $10 each and won $100 from their office pool, they could net the entry fee from the winning pool against the income, reporting $90 in winnings. For taxpayers who itemize, the entry fee from the losing pool and any other gambling losses would be taken as an itemized deduction, up to a maximum of $90.
Professional gamblers have different benefits and requirements
Taxpayers whose betting is more than a hobby need to file differently. If gambling is their full-time job and how they intend to earn their livelihood, they would need to file as a business with a Schedule C. Filing as a business means they can deduct more expenses, but it also subjects them to self-employment tax and possibly quarterly estimated payments.
Two wrongs don’t make a right: illegal betting and tax evasion
Illegal gambling doesn’t make the winnings tax-free. Taxpayers who make illegal wagers and win still need to report the income on their tax return. If the taxpayer itemizes deductions, they can still deduct the loss to the extent of gain.
Winners this weekend need to keep more than their ticket to claim their prize. They should keep a record of their expenses and income for next April’s tax deadline – or if they’re professional gamblers, their June 15 estimated payment deadline is just about a month away.
Find out how to exactly document any crowdfunding income from this year on a 1099-K form to avoid last-minute penalties.
Taxpayers should be careful when considering giving other tax benefits. In some cases, careful tax planning can reduce or eliminate negative tax effects.
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