Does Michigan Tax Gambling Winnings
Gambling wins are reported on the front page of Form 1040 for tax years 2017 and prior. Gambling wins are reported on Schedule 1, Line 21 for tax year 2018. All gambling wins are required to be reported even if the casino doesn’t report the win to the IRS. Gambling wins are reported on a W-2G for. Some gaming organizations will also have to submit a W-2G, a tax form that officially reports gambling winnings on your behalf. Most of these are submitted for winnings more than a certain amount, such as $1,200. If you aren’t sure if you’ve received a W-2G or not, contact the gaming organization (s) that issued your winnings.
Taxes are probably the last thing on your mind during an exciting gambling session. However, they inevitably come up following a big win or profitable year.
You may have two main questions at this point:
- Do I need to pay taxes on my wins?
- If so, how much do I have to pay?
The following guide discusses whether your gambling wins are taxable and other important topics regarding this subject.
The Short Answer Is Yes
I’ll cut right to the chase: yes, you do need to pay federal taxes on gambling winnings in the United States. This is especially true when you net a big win and receive a W-2G form.
According to the IRS, a gambling establishment should issue a W-2G when you win an amount that’s subject to federal income tax withholding (24% of win).
Slot machines present a famous example of when you’ll receive a W-2G form after winning so much. Casinos must issue a form when you win a prize worth $1,200 or more through slots or video poker.
As for the second point, a sportsbook or racetrack must withhold federal taxes when you win a bet worth 300x your initial stake. If you wager $5 and win $3,000, for example, then the bookmaker will issue a W-2G form and withhold $720 (24%).
Here’s a broader look at the W-2G and tax withholding threshold for different types of gambling:
- $600+ through sportsbooks and racetracks (provided it’s 300x your stake).
- $1,200+ through a slot machine, video poker machine, or bingo game.
- $1,500+ through keno.
- $5,000+ through a poker tournament.
All Winnings Are Subject to Taxation
Technically, you’re supposed to report any gambling winnings—big or small. Even if you win $20 in an office betting pool, the IRS wants to know about it.
If you want to stay above board, then you should report all wins on Form 1040 (under “other income”). As I’ll cover later, you can deduct losses from winnings as well.
Furthermore, any amount that’s withheld by a casino, poker room, sportsbook, or racetrack is deducted from what you owe. Gambling establishments keep 24% of a win when they do withhold money.
W-2G Forms Don’t Apply to Table Games
You’ll receive a W-2G when earning big wins through most types of gambling. However, casino table games are an exception to the norm.
Unlike a jackpot game (e.g. video poker) or a poker tournament, casinos have no idea how much money you start with in a table game. Therefore, they can’t really determine when you do and don’t experience big wins.
Examples of table games that are exempt from W-2G forms include:
- Baccarat
- Blackjack
- Caribbean stud
- Craps
- Roulette
- Three-card poker
The IRS still expects you to pay taxes on profits earned through table games. Again, though, the casino can’t issue a W-2G because they can’t tell how much money you’ve actually won.
Some States Tax Gambling Winnings
Most states tax your income, including gambling winnings. Depending upon where you live, you’ll probably need to pay taxes to both the IRS and your state.
For Example:Michigan features a 4.25% flat income tax. The Wolverine State expects you to pay this same 4.25% rate on gambling wins.
West Virginia, on the other hand, doesn’t tax your winnings. Casinos/sportsbooks in the Mountaineer State only withhold federal taxes (when necessary).
Assuming you travel to another state to gamble, you may have two states wanting taxes. Luckily, though, you won’t be subject to double taxation.
Instead, your home state will give you credit for whatever taxes are paid to the state where the winnings occurred.
Can You Deduct Losses?
You can deduct gambling losses from winnings. However, these deductions are itemized rather than standard deductions.
Here’s an example to explain:
- You win $5,000 through sports betting.
- You lose $4,500.
- You must report the full $5,000—not $500 (5,000 – 4,500)—under other income.
- Meanwhile, the $4,500 is reported through various itemized deductions.
In short, itemized deductions are expenses that reduce your taxable income. The standardized variety includes flat-dollar, common deductions.
You may be able to save more money through itemized deductions. However, standard deductions are easier to deal with and also have the potential to save you more money.
Regardless, you must use itemized deductions when dealing with losses. This means spending more time on your tax returns or working with an accountant.
Keep in mind that you won’t receive a tax refund for gambling losses. Instead, you can only deduct an amount equal to your winnings each year. If you win $3,500, for example, then you can’t deduct more than $3.5k and expect a return.
Keep Records on Wins & Losses
The IRS may take your word at face value when it comes to gambling. Of course, they also have the ability to audit you when they deem it necessary.
That said, you don’t want to guestimate on your wins and losses. Instead, you want proof through the form of records.
Journals offer a great way to record your gambling activities. You can log the following for each entry:
- Date of gambling session
- Location of the establishment
- Game played
- Starting bankroll
- Ending bankroll
Such entries don’t guarantee you’re being honest. However, they at least show the IRS that you’re making a legitimate attempt at recordkeeping.
You can take your recordkeeping efforts even further by holding onto any other relevant documents. Betting slips, winning tickets, canceled checks, bank statements, W-2G forms, and anything else of relevance are all worth saving.
What Happens If You Don’t Report Gambling Winnings?
The IRS fully expects you to report gambling winnings and especially annual profits. They don’t take kindly to you failing to report these wins.
Of course, you’re unlikely to draw an audit for winning a $25 sports bet. You stand a higher chance of being audited, though, if you win enough for a W-2G form.
In this case, the casino/sportsbook/racetrack also sends a copy of the from to the IRS. The latter features reliable software that can match up your reported income with documentation of nonreported income.
Assuming you fail to report gambling winnings, then the IRS may do little more than send a letter and issue a small fine. You should definitely pay up, or at least work out a payment plan, in this case.
You’ll face more serious consequences, though, if you fail to report a huge win and lie about the matter when/if caught. Refusal to pay and/or heavy efforts to cover up the deceit will lead to bigger fines and possibly jail time.
Gamblers Stand Increased Chances of an Audit
Nobody likes attracting an audit from the IRS. Unfortunately, the chances of being audited increase for gamblers.
This is especially true when you net a big win and receive a W-2G. Of course, you can reduce the odds of being audited by claiming anything on the form.
The IRS may also become suspicious if you claim big losses on your tax return. You’ll put the taxman on increased alert when winning a huge prize (e.g. $50,000) and claiming a matching amount of losses.
Also, you can’t write off hotel stays, meals, and entertainment as a casual gambler. You must be a professional to claim such itemized deductions.
How Do Professional Gamblers Report Winnings?
Pro gamblers claim winnings on Schedule C as a self-employed person rather than as other income on Form 1040.
Even as a professional, you can’t deduct more losses than winnings in a year. You’re stuck in a tough situation with treating gambling as a day job, yet not being able to file losses that exceed winnings.
As mentioned before, though, you’re able to deduct business expenses like hotel stays and meals. These expenses just need to be a legitimate part of your business.
Conclusion
In answer to the original question, yes, you’re supposed to claim real money gambling winnings on federal tax forms. Even if you end up losing money on the year, the IRS wants to see your wins and losses.
Of course, tax collectors don’t care a great deal when you win $200 on the year. They spend most of their time looking for bigger winners.
The times when you want to be especially diligent in this matter include:
- When you book a large win and receive a W-2G form.
- If you win a significant amount of profits throughout the year.
- When you win 600x your bet with a sports or horse wager.
Again, the IRS and your state (if applicable) expect all gambling winnings to be reported. But you can use some commonsense in deciding when reporting wins are truly necessary.
Please enable JavaScript to view the comments powered by Disqus.November 13, 2017 by April Thiel, CPA
You Win Some, You Lose Some at the Casino!
I would really love it if a client of mine called me up one day and said, “I won big at the casino! How do I report that?” While we all may dream of hitting it big, the reality is, many walk away with empty pockets.
“Can I deduct those losses?” is a question posed by the less than lucky when it comes time to file their tax returns. While people generally expect to pay state and federal income tax on winnings, they typically growl when they learn that the tax system is not a two-way street when it comes to reporting losses.
It comes down to whether you are a “professional gambler,” or what the Internal Revenue Service (IRS) calls a “casual gambler.” Unless the way you play lands you on the World Series of Poker on ESPN or playing slots is your 9-5 job, the general answer is “casual gambler.”
Unfortunately, “casual gambler” is not a good answer for tax purposes. A professional gambler is just as you might imagine; gambling is their business, their profession. They can deduct expenses and losses like any other business. However, as a casual gambler, unless you meet strict IRS guidelines, you may lose out on benefiting from gambling losses at tax time.
Does Michigan Tax Gambling Winnings
There are standards that must be met and the designation of professional or casual gambler is based on “facts and circumstances.” As a casual gambler, you could use some of the losses on your federal return if you itemize, but not nearly to the extent most would like. They are limited to the amount of gains you had, and only on your Schedule A as an itemized deduction. Additionally, in past years you did not benefit from any of those losses when it came to your Michigan return. In Michigan, your beginning tax calculation starts with your federal adjusted gross income—which did not include gambling losses for casual gamblers, until recently.
Michigan now allows “session method” previously only for pros
In 2016, Michigan issued a Revenue Administration Bulletin that specifically lays out what the state will allow when it comes to reporting gambling income and losses. Beginning in January 2016, Michigan now recognizes the “session method” of reporting your gambling income and losses. This is the only way to receive any type of benefit from wagering losses in Michigan.
Does Michigan Tax Gambling Winnings Rules
As a casual gambler, this does not mean you can deduct a loss on your wagering, but it does mean that you can now at least use your daily losses to offset your winnings on the same type of game on the same day (or session), up until a break-even point (not less than zero.) For many who stick to the same types of games (i.e., tables versus slots) this is promising news. Additionally, most casinos utilize player cards that handle the record keeping that the IRS and state require upon an audit. You would need to be consistent for federal and state purposes, but by lowering your federal adjusted gross income using the session method, you potentially save yourself a great deal of state tax that was not an option in the past.
As an example, I may have a W-2G from the casino for $2,000; but I really spent $3,000 for a $1,000 loss playing my favorite slot machine all on one day. Without using the session method, I potentially must pay federal tax on $2,000, unless I itemize. I may be able to use $2,000 as an itemized deduction if I am eligible to file Schedule A. Either way, I’m still paying tax on winnings even though I walked away with less money than I started with. I would also have to pay Michigan tax on $2,000. Using the session method, I cannot deduct a loss of $1,000, but I also will not be paying either federal or state tax on the W-2G amount.
How can this help you?
If you are organized and can provide the required support under audit, you may be able to utilize the session method and save tax dollars, especially now in Michigan. As with any tax topic, it can be complex and you should always consult your tax advisor.
Contact us today, we can help you keep more of your winnings or potentially ease the pain of a loss.