Many of us hope to win the Lottery at some point in our lives. We dream of the easy life, and being able to buy whatever we want without concern of the cost, but what are some of the tax ramifications of such a windfall? Whether it’s the lottery, a pool at work, keno, scratchers or some other game of chance, there are a few ways to keep more of what you win, and pay the tax man less. If you’re a casual gambler, odds are good that these basic tax tips can help you at tax time next year:
- Gambling income. Gambling income includes winnings from lotteries, horse racing and casinos. It also includes cash prizes and the fair market value of prizes like cars and trips.
- Payer tax form. If you win, you may get a Form W-2G, Certain Gambling Winnings, from the payer. The IRS also gets a copy of the W-2G. The payer issues the form depending on the type of game you played, the amount of your winnings and other factors. You’ll also get the form if the payer withholds taxes from what you won.
- How to report winnings. You must report all your gambling winnings as income. This is true even if you don’t receive a Form W-2G. You normally report your winnings for the year on your tax return as ‘other income.’
- How to deduct losses. You can deduct your gambling losses on Schedule A, Itemized Deductions. The amount you can deduct is limited to the amount of the gambling income you report on your return.
- Keep gambling receipts. You should keep track of your wins and losses. This includes keeping items such as a gambling log or diary, receipts, statements or tickets. Often, once players find out they did NOT win, people simply throw the losing tickets away. WRONG!! You may not win today but keep all those losing tickets until the end of the year as proof that you lost. This, because you can reduce any winnings that year against any losses you incur until the end of the year. Then you start over again next year. Consider throwing away $1,000 worth of losing tickets, and then at the end of the year, you win $3000. You will pay taxes overall $3,000 unless you kept the losing tickets. Keeping these losing tickets lets you reduce your winnings and your tax bill. For most people that’s about a $300 tax savings.
- Seek professional advice. If you win the BIG one, always see a good accountant and attorney BEFORE you tell anyone about the win. These professionals can give you some excellent advice before going public.
- Consider a Partnership Strategy for ownership of tickets. If you buy a ticket as a member of a group or family, consider a Limited Partnership strategy to be the entity that owns the winning ticket, rather than one person. This is a great way to reduce taxes by spreading the wealth as they say around the family or group, because many in the group will be at different tax brackets.
- Decide which payout option to use. Consider whether to take the cash payout or the 20-year payout. For older winners, the cash payout may be best, but then again, maybe a 20-year payout might be a form of protection for your heirs. Again, seek professional advice BEFORE collecting your winnings.
Here are some points to remember:
- Keep your playing tickets until year end (in case you win later)
- Seek professional assistance (CPA and Attorney)
- Consider a partnership to own the winning ticket
- Decide which pay out option is best for you (immediate cash pay out or 20 years)
Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.