Gambling in the U.S.? Know Your Tax Obligations

Many people have the misconception that gambling winnings are only taxable in the U.S. if you are a U.S citizen or resident, and that is simply not true.

Gambling/lottery winnings from the U.S. are fully taxable to anyone and must be reported on a U.S. tax return. There is no requirement to file a U.S. tax return unless withholding taxes have not been taken on the income or too much has been taken. If the required withholdings are taken, one does not have to file a return; however, if a tax refund is desired because the withholding tax is too high, one must file in order to claim it. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, casinos, cash winnings and also the fair market value of prizes such as cars and trips.

Recovering Taxes on Gambling Winnings. A 25% withholding tax is applicable on winnings over a certain dollar amount and the only way to recover the tax is to file a tax return to claim the refund. This process is different for a U.S. non-resident and a U.S. citizen/resident.

U.S. Residents. The only way to recover the tax is to deduct gambling losses for the year against the winnings for that year but you can only deduct enough losses to cover the winnings, nothing more. A U.S. citizen/resident can only deduct the losses as part of their “itemized deductions” but the problem is that most people in this situation do not itemize their deductions. Instead they take the “standard deduction” amount on the tax return, because it results in a higher deduction. This means that the taxes withheld on the gambling winnings cannot be recovered in most cases.

U.S. Non-residents. Canadians gambling in the U.S. would deduct gambling losses on form 1040NR; however, these are not deducted as an itemized deduction but on a separate section of the return specifically for gambling activity.

The personal exemption cannot be deducted against gambling/lottery winnings by non-residents.

It is important to keep an accurate diary or similar record of your gambling winnings and losses in case the IRS asks for proof of your losses to support your claim. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

U.S. Citizens Living in Canada. If a U.S. citizen is also a Canadian resident and he or she wins a Canadian lottery, the winnings are not taxable in Canada but are fully taxable in the U.S.; therefore, it is always good tax planning to ensure that the Canadian spouse is the one who declares the lottery win if there is a U.S.-citizen spouse in the family.

Real Life: Canadian (non-U.S. citizen) hitting it big in the U.S.

Johnny is a Canadian resident, (non-U.S. citizen) who likes to frequent the casinos in Las Vegas. While in Vegas he was a lucky man and won $10,000 playing blackjack. In accordance with the U.S. tax laws, the casino withheld $2,500 and issued a W-2G slip to Johnny for use in filing his tax return. Johnny’s losses for the year total $8,000, which means that he can only claim the $8,000 of losses against his $10,000 of winnings, giving him a withholding tax recovery of $2,000. (In this case, he ends up having to pay $500 in tax on his winnings for the year, $2,500 - $2,000.)

Excerpted from Canadians & The IRS. © Knowledge Bureau, Inc. All rights reserved.