By Frank Sutherland, CPA.
For any discussion of income taxes and gambling it is important to remember that ALL winnings are taxable and that accurate records must be kept for proper tax reporting. Record keeping and income taxes are not the foremost items on gamblers’ minds while they are gambling, nor should they be. The purposes of this article are to explore the use of withholding to ease the tax reporting paperwork burden; ensure that large tax bills are not owed at the end of the year; and to thus give the gamblers the peace of mind to enjoy their winnings. This article is about withholding taxes, but necessarily involves IRS requirements for reporting winnings and payment of estimated taxes.1)<a class="glossaryLink" aria-describedby="tt" data-cmtooltip="
” href=”https://www.blackjackreview.com/wp/encyclopedia/d/#MichaelDalton” data-mobile-support=”0″ data-gt-translate-attributes=”[{"attribute":"data-cmtooltip", "format":"html"}]” tabindex=”0″ role=”link”>EDITOR NOTE: This article was originally published in the Winter 1995 issue of Blackjack Review Magazine. For current advice on your personal tax situation be sure to do your own research and seek out the advice of a respected tax accountant or expert.
The author is suggesting that it may be preferable to have taxes withheld from winnings.
Tax withholding is required for winnings over $5,000 for all forms of gambling except slots, bingo and keno; withholding is not required for these three forms of gambling. Further, IRS requires casinos and other payers to report gambling winnings over $600 from all forms of gambling, except for slots and bingo ($1,200), and keno ($1,500). Additionally, estimated tax payments are required when the taxes due from all income items exceed total withholdings and other credits by about $500. The combination of these rules suggests that it may be wiser and easier for gamblers to simply request that taxes be withheld for winnings above the reporting levels of $600, $1,200, and $1,500.
To minimize their taxes, gamblers should keep records and keep abreast of winnings and losses so they can properly file their taxes, deduct their losses and adjust their tax withholding or accurately pay estimated taxes to cover substantial winnings. For this article it is assumed that gamblers keep such records and therefore know before any win how their withholding amounts compare to their total tax liability for the year. This is important because any amount to be withheld should be reasonably close to what will actually be owed.
The primary reason that it may make sense for gamblers to elect withholding from winnings above the reporting levels is that the filing and payment of estimated taxes is required when taxpayers’ likely taxes will exceed withholding and other credits by about $500. For gamblers in the 28% tax bracket this would occur with winnings as low as $1,800; (.28 x $1,786 = $500), if all other income and withholdings were equal. (Note: There are a number of other conditions which may make estimated tax payments unnecessary, so gamblers should get and review IRS Publication 505 – Tax Withholding and Estimated Taxes – to determine the exact rules that apply to their particular circumstances.) Further, casinos and other payers have to complete Forms W-2G for winnings above the reporting level, so having the taxes withheld would impose little additional burden on the payer. The casinos and other payers would probably prefer to NOT withhold so gamblers would continue to gamble, but winners can request that taxes be withheld for wins above the reporting levels. Also, gamblers themselves who prefer to ‘keep their money in play’ have the option of paying taxes through the estimated tax route, for winnings below the withholding levels.
To illustrate the effects of withholding from winnings, several assumptions were made to keep the numbers simple, and to isolate the effects due solely to withholding. These assumptions are: 1) A gambler wins $5,000 on 1/2/94, (no withholding required); 2) the winner is in a marginal 28% tax bracket; 3) the winner could invest funds for short terms at 6% annually; 4) the winners’ withholding and tax liability for other income are equal; and this win is the only gaming item in this case. In this illustration, the winner would experience a “cost” of about $52.50 in lost interest related to the withholding of $1,400 (28% of $5,000) from his winnings. From this illustration it can be shown mathematically that winners would experience MAXIMUM lost interest of 1.05% of any amounts won, if taxes are withheld at the time of the win. For winnings between $600 and $5,000, the amount withheld at 28% would range from $168 to $1,400, and the MAXIMUM “costs” in lost interest would range from $6.30 to $52.50.
This lost interest would be the only extra “cost”, because the winner would have had to pay income taxes on the win at the time of tax filing or earlier. The reason the additional “cost” to the winner is so low is that estimated taxes would have been required in the absence of the withholding election, and therefore the “cost” of the withholding is simply the interest which could have been earned if estimated taxes were paid at a later time, instead of having taxes withheld at the time of the win. These estimated taxes have to be paid by the 15th of the month following the close of the quarter in which the win occurred, and they can be paid in full or in four installments, so there are brief periods when the amounts withheld otherwise could have been invested.
Considering the relatively small amount of lost interest compared to the amount won, gamblers may want to consider having taxes withheld any time their winnings are large enough to be reported and certainly anytime their winnings are large enough to trigger a need for paying estimated taxes. The advantages in having taxes withheld are in not having to file estimated taxes or be faced with penalties and interest for inaccurate or late filing, and the comfort of knowing that taxes are paid for winnings. The disadvantage of the lost interest is probably overstated because investing for short periods is frequently done in interest bearing checking accounts which pay considerably less than 6%, more like about 3%.2)<a class="glossaryLink" aria-describedby="tt" data-cmtooltip="
” href=”https://www.blackjackreview.com/wp/encyclopedia/d/#MichaelDalton” data-mobile-support=”0″ data-gt-translate-attributes=”[{"attribute":"data-cmtooltip", "format":"html"}]” tabindex=”0″ role=”link”>EDITOR NOTE: Ahhh, the 1990s. You may have to search around a bit to get a savings account interest rate above 3% today. The disadvantage of gamblers not having the use of the amounts withheld is likely offset by not having to file estimated taxes, or face a large tax bill with added interest and penalties.
MORE INFORMATION ON THIS SUBJECT:
Tips for gambling winnings and losses
IRS Gambling Income and Losses
IRS Instructions for Forms W-2G and 5754
IRS Publication 505: Tax Withholding and Estimated Tax
IMAGE CREDIT: Flickr.com
ABOUT THE AUTHOR: Frank Sutherland has written articles on taxes and gaming and has written and published a book on gaming, entitled — Gambling & Taxes – It’s Your Money. The author is (was) a CPA in Colorado, a member of the AICPA and the Colorado Society of CPAs. He has a bachelors degree in accounting from the University of Colorado and Master’s degree in Business Administration from the University of Northern Colorado. The author has over 30 years of auditing and program analysis experience with the Federal government, including the evaluation of laws, regulations, and program administration.
- SCCG Management. The Gambling Industry’s Global Connector. Access Here.
- Source: https://www.blackjackreview.com/wp/2025/03/29/to-withhold-gambling-income-taxes-or-not-that-is-the-question/