Like all other taxable income, the IRS requires you to report prizes and winnings on your tax return, too. That means you might have to pay taxes on those winnings. Your winnings end up being included in your taxable income, which is used to calculate the tax you owe. But before you report your prize and gambling income, you need to know what does and doesn't count as income.
The US uses a flat 25% tax rate on all gambling winnings. Taxes are applied to all gambling, including sweepstakes and other prizes. When you hit a taxable win in a physical casino, you’ll get a.
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Whether you play the lottery, slots, blackjack, roulette or another game considered gambling, you must report all of your winnings even if you end up losing money overall.
The IRS states that you're supposed to keep a diary or similar record that details your winnings and losses, which includes information such as:
You should also keep other documentation that demonstrates your gambling activities such as,
Depending on the size of your win, you may receive a Form W-2G, Certain Gambling Winnings and may have federal income taxes withheld from your prize by the gambling establishment.
Gambling winnings are unique because you can also deduct your gambling losses and certain other expenses, but only in specific circumstances (see our article about this).
You don't need to worry about which forms you need to fill out, though. TurboTax will ask you simple questions to get the necessary information to fill out the forms on your behalf based on your answers.
Casinos and lotteries aren't the only ways you can win money or other prizes. If you've received any kind of income from the following sources, you'll have to report it to the IRS, as well.
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Whether you've already won the grand prize or think this is going to be your lucky year, it pays to have your questions answered before it comes time to file. Here are some of the most popular questions and what you need to know.
Is your tax bracket affected by what you win?
Your winnings are part of your taxable income, which determines what marginal tax bracket you fall into. Only the additional income in the higher tax brackets will be taxed at the higher rates. Any income that falls in the lower tax brackets will be taxed at the lower rates.
Are the tax rules different if you receive a lump-sum payout vs. a payout in pieces over time?
The rules regarding tax on winnings are the same whether the prize is issued in a lump-sum payout or in pieces over time. You report the income when you receive it. That said, the tax impacts can be different based on the year you receive the income because the amount of tax you pay is based on your total taxable income each year.
What if I didn't receive a Form 1099-MISC or a Form W-2G?
It doesn't matter if you receive a 1099-MISC or a W-2G reporting your winnings or not. You'll still need to report all income to the IRS. You just have to add your unreported winnings amounts to the applicable lines on your tax return.
Thankfully, you don't need to know where to place each item of unreported income on your tax return. TurboTax can help by asking simple questions to make sure you're reporting all of your income and winnings that need to be reported.
How can you prepare yourself and your finances after you win but before you file your tax return?
After you win money, you should take steps to prepare for the potential tax impact. Ideally, you should set aside a portion of those winnings to cover the taxes you'll owe, so you have the money when it's time to pay your taxes.
Keep in mind, you can't wait to pay taxes until the tax deadline if it's over a certain amount. See the section 'Do I need to pay estimated taxes' in our article 'Estimated Taxes: How to Determine What to Pay and When' to determine if you meet these thresholds.
Your taxes have many moving parts that could result in a higher or lower amount owed than your estimate if things don't go exactly as you plan. If you set aside too much money, you can always reclaim the money later, but if you don't set aside enough, you may find yourself owing a big tax bill come tax time.
Remember, with TurboTax, we'll ask you simple questions and fill out the right tax forms based on your answers to maximize your tax deductions.
This article was originally published by TheStreet.