So you’ve bought a winning lottery ticket in Virginia? Congratulations. Now comes the even greater fun of paying taxes on your winnings!
Gambling income, from any source, is taxable under federal and state laws. The same goes for any prizes you win gambling as well, like boats, cars, or motorcycles. You have to report all your winnings on your income tax returns.
With the looming launch of online and perhaps retail sports wagering in VA, this information is soon to become even more pertinent. As such, you probably have some questions, to which we have the answers.
Will the VA Lottery withhold part of my gambling winnings?
It depends on how much you won. Prizes of less than $600 typically are not subject to automatic withholding because that’s below the threshold for federal reporting. The VA lottery will withhold 4% of prizes of $601 or more automatically.
If you visit a casino in another state, the casino will usually withhold taxes from your winnings as well. The same will likely apply if casinos ever open in Old Dominion.
However, that doesn’t necessarily mean you won’t have to pay further tax on your winnings. That’s partially dependent on your federal and state tax bracket. Withholding also does not impact your responsibility to report your winnings.
How do I know whether I need to report my gambling winnings?
While it’s never fun to pay taxes on gambling winnings, this is one area in which it’s better to err on the side of caution. There are some guidelines for whether you need to report your income from gambling to the IRS and the state.
- Your winnings from playing bing or slots (not reduced by the wager) are at least $1,200
- Your winnings from a keno game (reduced by the wager) are at least $1,500
- The amount of your winnings from playing poker (reduced by the wager or buy-in) are at least $5,000
- The amount of your winnings from any other type of gambling (except winnings from bingo, slot machines, keno, and poker tournaments), reduced by the wager, are either at least $600 or more or at least 300 times the amount of your wager
- Your winnings are subject to federal income tax withholding for any other reason (either regular gambling withholding or backup withholding)
It’s important to note that these levels are cumulative throughout a tax year. For example, if you win $400 playing slots on three separate occasions during the same year, that gets you to the $1,200 threshold.
If you’ve crossed those thresholds during a tax year, you’ll need to report your winnings to the IRS and the VA Dept. of Revenue. For your federal taxes, the form you need is the W-2G.
What to do with a Form W-2G, Certain Gambling Winnings
In most cases, there won’t be much for you to do, actually. The party that pays out the winnings to you, a casino, sportsbook, lottery, etc., is responsible for sending a completed Form W-2G to you.
This form reports your winnings from that source for the entire tax year to both the IRS and you. It will also note any tax withheld from your payout by that party.
It’s standard for casinos and sportsbooks to withhold at least a quarter of your qualifying winnings for tax purposes. Some gambling companies may withhold as much as 28%.
If you collect winnings over the course of a tax year from multiple companies, you should receive a separate W-2G from each. For example, if you win over $600 from a sportsbook and another $1,200 playing slots at a casino next year, you would get a W-2G from both for 2021.
After you’ve received all your W-2G forms, you need to transfer your total gambling winnings from all sources and any amounts withheld to your income tax return. Simply add up all the amounts from Box 1 on all your W-2G forms and then list that total as “Other Income” on your Form 1040, Schedule 1.
The same amount then goes on Line 7a of your Form 1040. Attach the Schedule 1 to your Form 1040. Your W-2G form(s) will also show any tax withheld in Box 2. Again, add up those amounts, if you have multiple W-2G forms.
That total then goes on Line 17 of your Form 1040. Do not attach any of your W-2G forms. Keep those for your own records. The IRS recommends you do so for at least five years. At that point, you’re done with your federal obligations.
Virginia state taxes for gambling
You aren’t finished, however. Old Dominion needs its cut of your winnings as well. The VA Lottery automatically withholds 4% of your winnings for state tax purposes, for example.
The state considers all other gambling winnings income, so what rate you pay depends on how much income you collected from all sources during a tax year. Virginia has an income tax for its residents that is a hybrid of a flat and graduated tax. The amounts and rates for 2020 are:
- $0-$3,000: 2%
- $3,000-$5,000: $60 + 3% of excess of $3,000
- $5,001-$17,000: $120 + 5% of excess over $5,000
- $17,001 and up: $720 + 5.75% of excess over $17,000
If you’re a VA resident, you should report your gambling winnings on Form 760. If you won your cash or prize in another state and the gambling entity that awarded that prize withheld state income tax there, you can claim that amount as a deduction against your VA tax liability.
You should use a Schedule OSC for that purpose. The amount you won gambling in other states goes on Line 3 while any amount withheld goes onto Line 5. This is pretty simple once you receive your W-2G. Not getting one doesn’t let you off the hook for reporting, however.
What if I didn’t get a Form W-2G?
If you collected gambling winnings over the course of a year but didn’t get a Form W-2G from the casino, lottery, or sportsbook, the first thing to do is to try to contact that entity. There may have been some mistake or oversight.
Just because you didn’t get a Form W-2G doesn’t mean you don’t have to report your winnings, however. In many cases, the appropriate taxes have already been withheld from your winnings, so you won’t increase your tax liability by reporting.
If you don’t report, however, you may put yourself at risk of underreporting. That can result in the IRS and/or the state imposing fines on you and charging you interest.
What if I’m part of a group of people who hit a lottery jackpot?
If you pooled your resources with some co-workers or friends to buy lottery tickets and your decision paid off handsomely, there is a procedure just for that scenario. It requires a little bit of work on your end.
You’ll need Form 5754 and a little bit of information about each person in the group. Once you complete it, make a copy for everyone in the group and then submit the original to the payer of your winnings.
The casino, lottery, sportsbook, etc., will use that form to prepare W-2G forms for everyone in the group. Again, do not send Form 5754 with your tax return to the IRS. Keep it for your own records.
Can I deduct anything related to gambling?
Yes, but you must opt to itemize your deductions instead of taking the standard deduction. You can deduct your gambling losses from your federal tax liability in that instance.
Note that you cannot deduct anything other than the amount you wagered and lost. It’s not a matter of subtracting your losses for the year from your winnings and reporting the difference, either. Your losses for the year cannot surpass your winnings.
If you opt to deduct your gambling losses, keep all the records of your activity for at least five years. This includes lottery tickets, receipts for bets, and bank statements.
One convenient way to track your losses for the year is to join online sportsbooks’ rewards programs. They are free and one of the features is they provide you with an annual statement of your activity.
Once you’ve calculated your total for the year, place it on Line 28 of Schedule A, Form 1040. Once again, this is just for your federal taxes. Virginia does not allow you to deduct gambling losses.
Sports betting winnings and taxes
Virginia sports betting is now legal, in both retail and online operations. If you win more than $600 wagering on sporting events over the course of a tax year, you must report your winnings to both the IRS and the state.
Just like with casino and lottery winnings, you should receive a Form W-2G from the sportsbook(s) you bet with. The procedure for reporting your sports betting winnings is the same as any other gambling winnings.
That also means you can deduct your losses wagering on sporting events should you opt to itemize your federal deductions. Once again, it’s crucial to keep detailed records.
If you’re uncertain of anything regarding gambling losses or winnings and either federal and state taxes, there are many CPAs and tax attorneys in VA whose profession it is to assist you. Congratulations and enjoy your after-tax winnings!