Winning big at a casino is cause to celebrate. But, before celebrations get too out of hand, be sure to keep in mind that a chunk of those winnings will go to Uncle Sam. A failure to pay these taxes can result in an audit, which could lead to penalties and fees that may exceed the winnings.
How do I know if I have to pay taxes on my winnings?
Basically, anyone that wins at the casino, has a winning lottery ticket or otherwise comes into some gambling winnings will likely need to pay taxes. Winners should keep two different types of taxes in mind:
- State taxes. Minnesota residents are generally required to report winnings on state tax returns. The Minnesota Department of Revenue explains that winnings reported include those won in the state as well as winnings from other states, other countries or even those won on the Internet. Reporting is required, even if the winner did not receive a federal Form W-2G, Certain Gambling Winnings.
- Federal taxes. The Internal Revenue Service (IRS) notes that winnings from gambling, horse racing or the lottery must be reported on federal returns as income. These winnings generally qualify as “other income.” Gambling losses can count as a deduction for federal tax purposes in certain situations. Essentially, the reported loss used for the deduction can count against any winnings, but cannot exceed the winnings. Basically this means that you cannot deduct more than you won.
As with anything involving taxes, it is important to keep copies of your receipts. This can be of use in the event the IRS questions your tax filings.
It is wise to get a lawyer if the IRS contacts you about these winnings. An experienced tax lawyer can review the questions the IRS has about your winnings and guide you through the process, helping you to build a strong case against the claim and better ensuring your rights are protected.