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Old 10-21-2004, 02:59 PM
dakine dakine is offline
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Default Posting Again: Gambling and Taxes.

Lengthy reading, but this was the only way I knew how to post this. Very informative.

The Internal Revenue Code is unkind to winners -- and it doesn't much like losers, either. The federal government taxes gambling winnings at the highest rates allowed. So do the many states and even cities that impose income taxes on their residents. If you make enough money in a high-tax state like California or New York, the top tax bracket is about 50 percent. Out of every additional dollar you take in, through work or play, governments take 50 cents.

Of course, the tax-collector first has to find out that you have won. Congress and the Internal Revenue Service know gambling is an all-cash business and few winners indeed would voluntarily report their good luck. So, statutes and regulations turn the gambling businesses, casinos, state lotteries, race tracks and even bingo halls, into agents for the IRS.

Big winners are reported to the IRS on a special Form W-2G. If winnings are to be split, as with a lottery pool, winners are reported on a Form 5754.

Pooling money to buy lottery tickets is common among employees and friends. But whether there are two or 200 in the pool, there is going to be only one winning ticket, and somebody has to turn it in. If you are that someone, make sure you fill out a Form 5754. If your share of a $5 million prize is $1 million, you do not want to be stuck with paying income tax on the entire $5 million.

Gambling has become such big business that the IRS receives nearly four million Forms W-2G and 5754 each year. This tells the tax-collectors that nearly four million big winners are out there, waiting to be taxed.

But the IRS does not always wait. The government wants to make sure it gets paid. What good does a W-2G do if the winner is a foreigner who is going to be in his own foreign country when April 15th rolls around?

So, the IRS not only wants reports filed, but often requires that a part of the winnings be withheld. As anyone who has a salary knows, withholding also allows the government to use taxpayers' money for many months, without having to pay interest.

The withholding rate for nonresident aliens is 30%. Not coincidentally, the tax rate for nonresident aliens is also 30%. So, if a citizen of a foreign country wins $1 million cash at a slot machine in Las Vegas, he will find he is paid only $700,000. The remaining $300,000 is sent to the IRS. The foreign citizen is unlikely to ever file an income tax return, but the IRS gets paid in full anyway.

Citizens of foreign countries are also, of course, usually taxed by their own governments. So some countries have treaties with the U.S. that protects those foreigners from having to pay the 30% withholding to the IRS.

U.S. citizens and resident aliens have it both better and worse than nonresident aliens. The withholding rate for gamblers living in American is only 28% (it was 20%, up to 1992). Having the IRS take $28,000 out of a jackpot of $100,000 is painful. But, it can hurt even more when tax forms are filled out. There is no 30% maximum tax for people living in the U.S., and really big winners often end up paying a lot more than 28% or 30%.

The one good news is Nevada casinos were also able to convince the IRS that they could not keep track of players at table games. They said that when a player cashes out for $7,000, they do not know whether he started with $25 or $25,000. So it is actually written into the law that there is no withholding or even reporting of big winnings to the IRS for blackjack, baccarat, craps, roulette or the big-6 wheel.

There is another general IRS rule that says anyone paying anyone else $600 in one year is supposed to file a report. The IRS has been going after casinos and cardrooms that run tournaments, forcing them to file tax reporting forms on grand prize winners. Here the IRS has the very good argument that the operator knows exactly how much a player has paid to enter the tournament and how much the finalists are given.

Is there anything a winning player can do to lower the bite of the income tax? And what about those who gamble and lose? Which is everybody, occasionally. The law does allow players to take gambling losses off their taxes, but only up to the amounts of their winnings.

Of course, if you win, say $135,000, you can take off all gambling losses, up to that amount. If you gambled away, say $65,000, you would only have to pay taxes on the remaining: $135,000 minus $65,000 equals $70,000. The tax on $70,000 is a lot less than the tax on $135,000.

Of course, you have the small problem of proving that you actually lost $65,000. Large winnings may be required to be reported to the IRS; large losses are not.

One former IRS Revenue Officer, who quit government to open his own small tax preparation firm, thought he found the answer. One of his clients won a share in a state lottery: $2.7 million, paid out over 20 years in installments of about $135,000, before taxes. The winnings were reported, but the tax return claimed gambling losses of $65,000. The IRS decided that $65,000 was a lot to lose, and it sent an agent to conduct an audit.

The tax preparer found a man with an extremely large collection of losing lottery tickets and made a deal: he would borrow 200,000 losing tickets for a month for $500. The losing tickets were bound in stacks of 100 and shown to the IRS auditor: 45,000 instant scratch tickets, 5,000 other Massachusetts lottery tickets, and 16,000 losing tickets from racetracks throughout New England. So many losing tickets, that it would have been physically impossible for one man to have made these bets. The New York Times called it "one of the more visibly inept efforts at tax fraud." They pleaded guilty eight days after being indicted.

By the way, the man who rented the tickets was not charged. It's not a crime to collect losing lottery tickets, only to use them to try and cheat the IRS.

SIDEBAR: Rules for Tax Reports and Withholdings on Winnings

Slot machines and bingo: Payouts of $1,200 or more are reported to the IRS, but there is no withholding taken out.
Keno: Similar to slot machines, but the amount won must be at least $1,500.
State lotteries and sweepstakes: Withholding is taken out of all winnings of more than $5,000.
Parimutuel pools, including horse and dog races: Subject to withholding, but only if the winnings are both more than $5,000 and at least 300 times as large as the amount bet.

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  #2  
Old 10-21-2004, 05:31 PM
dogmeat dogmeat is offline
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Default Re: Posting Again: Gambling and Taxes.

Thanks for the info. FWIW, I may have missed the point of your post. What was it?

Dogmeat [img]/images/graemlins/spade.gif[/img]
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  #3  
Old 10-21-2004, 06:35 PM
mmcd mmcd is offline
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Default Re: Posting Again: Gambling and Taxes.

The IRS are a bunch of theiving bastards. What else is new?
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  #4  
Old 10-21-2004, 06:51 PM
fnurt fnurt is offline
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Default Re: Posting Again: Gambling and Taxes.

[ QUOTE ]
The Internal Revenue Code is unkind to winners -- and it doesn't much like losers, either. The federal government taxes gambling winnings at the highest rates allowed.

[/ QUOTE ]

This is nonsensical. Gambling winnings are no different than any other income. They get taxed according to what tax bracket you fall into.

You only pay "the highest rates allowed" if your total income is over $320,000, in which case my heart bleeds for you, incidentally!

I don't think it's worth the time to pick this thing apart point by point, but when a silly statement like that appears in the very first paragraph, it's obvious you shouldn't put much weight on any of it.

I will note that the part dealing with deducting gambling losses from your winnings is clearly incorrect, and has been addressed in many threads on this forum and elsewhere.
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  #5  
Old 10-21-2004, 07:41 PM
dakine dakine is offline
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Default Re: Posting Again: Gambling and Taxes.

The information that I posted was derived from copyright material. For reasons stated, I did not include the authors name. This was posted for, "Oh..., I didn't know that" kind of people. Get my drift?

After the column was written, the IRS withholding tax law/code has changed. Check it out with your tax consultant.
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  #6  
Old 10-21-2004, 08:48 PM
Kurn, son of Mogh Kurn, son of Mogh is offline
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Default Re: Posting Again: Gambling and Taxes.

The federal government taxes gambling winnings at the highest rates allowed.

This is flat out false. Gambling winnings are taxed exactly the same as wages. They are all *ordinary income* and are taxed at exactly the same rate.
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  #7  
Old 10-21-2004, 09:49 PM
fnurt fnurt is offline
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Default Re: Posting Again: Gambling and Taxes.

[ QUOTE ]
The information that I posted was derived from copyright material. For reasons stated, I did not include the authors name. This was posted for, "Oh..., I didn't know that" kind of people. Get my drift?

After the column was written, the IRS withholding tax law/code has changed. Check it out with your tax consultant.

[/ QUOTE ]

Unless your drift is that you wanted to post an inaccurate article, no, I don't get your drift. Is the idea that if someone doesn't know anything about this stuff, it's better they get false information than no information at all?

I would be surprised to learn that there was ever a time in history when gambling income was subject to higher income tax than other types of income, really.
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  #8  
Old 10-21-2004, 10:05 PM
dakine dakine is offline
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Default Re: Posting Again: Gambling and Taxes.

Hey "Troll", take it up with the Proffessor.

http://www.gamblingandthelaw.com/
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  #9  
Old 10-21-2004, 10:31 PM
fnurt fnurt is offline
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Default Re: Posting Again: Gambling and Taxes.

I am taking it up with you so that readers of this forum don't have to take it up with the IRS.

I respect Professor Rose's views, but the idea that everyone is entitled to deduct their gambling losses is absolutely contrary to the rules of the IRS. Like I said, there have been many, many threads on this subject.
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  #10  
Old 10-21-2004, 10:56 PM
dakine dakine is offline
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Default Re: Posting Again: Gambling and Taxes.

[ QUOTE ]
I am taking it up with you so that readers of this forum don't have to take it up with the IRS.

I respect Professor Rose's views, but the idea that everyone is entitled to deduct their gambling losses is absolutely contrary to the rules of the IRS. Like I said, there have been many, many threads on this subject.

[/ QUOTE ]

Show me the "Way!" to those many, many threads. [img]/images/graemlins/confused.gif[/img]
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