Congratulations on purchasing a winning lottery ticket in Virginia! Now, it’s time to embrace the exciting experience of fulfilling your tax obligations on your winnings.
All forms of gambling earnings, regardless of the source, are subject to federal and state taxes. This also applies to any prizes obtained through gambling, such as boats, cars, or motorcycles. It is mandatory to include all winnings in your income tax returns.
As the launch of online and potentially retail sports betting in VA approaches, this information will become increasingly relevant. Therefore, it’s likely that you have some inquiries, and we are here to provide the answers.
Will the VA Lottery withhold part of my gambling winnings?
The amount you won determines the course of action. Prizes below $600 are usually not subjected to automatic withholding since they fall below the federal reporting threshold. However, if you win $601 or more in the VA lottery, 4% of the prize will be automatically withheld.
If you were to visit a casino in a different state, it is customary for the casino to withhold taxes from your winnings. It is highly likely that a similar practice will be implemented if casinos ever open in Old Dominion.
Nonetheless, it is important to note that there is still a possibility of additional tax obligations on your winnings. This is influenced, to some extent, by your federal and state tax bracket. Moreover, it is crucial to understand that withholding does not exempt you from the requirement to report your winnings.
How do I know whether I need to report my gambling winnings?
Although paying taxes on gambling winnings may not be enjoyable, it is advisable to exercise caution in this particular matter. Guidelines exist to determine whether it is necessary to report gambling income to both the IRS and the state.
- You are guaranteed to win at least $1,200 from playing bing or slots (excluding the wager amount).
- At minimum, you will receive $1,500 in winnings from a keno game after deducting the wager.
- You will receive a minimum of $5,000 in winnings from playing poker after subtracting the wager or buy-in amount.
- Your winnings from any form of gambling, excluding bingo, slot machines, keno, and poker tournaments, must either be $600 or more after deducting the wager, or be at least 300 times the amount of your wager.
- Any other reason for which your winnings may be subject to federal income tax withholding includes regular gambling withholding or backup withholding.
It is crucial to understand that these levels accumulate over the course of a tax year. For instance, if you win $400 from playing slots on three different occasions within the same year, this will bring your total winnings to the $1,200 threshold.
If you exceed the specified thresholds in a tax year, it is necessary to disclose your winnings to both the IRS and the VA Dept. of Revenue. To fulfill your federal tax obligations, you will be required to complete the W-2G form.
What to do with a Form W-2G, Certain Gambling Winnings
Typically, you won’t have many tasks to take care of. The entity that distributes your winnings, such as a casino, sportsbook, or lottery, is accountable for delivering a filled-out Form W-2G to you.
This form serves to report your winnings from that source for the entire tax year to both the IRS and yourself. Furthermore, it will indicate any tax that has been withheld from your payout by that party.
Casinos and sportsbooks typically retain a minimum of 25% of your eligible winnings for taxation purposes. In certain cases, gambling companies may hold back as much as 28%.
In the event that you accumulate winnings from multiple companies throughout a tax year, it is imperative that you obtain a distinct W-2G from each of them. To illustrate, suppose you obtain winnings exceeding $600 from a sportsbook and an additional $1,200 from playing slots at a casino in the upcoming year. Consequently, you would receive separate W-2Gs from both establishments for the year 2021.
Once you have obtained all your W-2G forms, it is necessary to transfer the combined sum of your gambling winnings from various sources and any withheld amounts to your income tax return. You can achieve this by calculating the total of Box 1 amounts on all your W-2G forms and including that sum as “Other Income” on your Form 1040, Schedule 1.
Next, transfer the identical sum to Line 7a of your Form 1040. Remember to include the attached Schedule 1 with your Form 1040. Additionally, Box 2 of your W-2G form(s) will display any tax withheld. Similarly, if you possess multiple W-2G forms, sum up the amounts accordingly.
After calculating the total, enter it on Line 17 of your Form 1040. Remember not to include any W-2G forms with your submission; instead, retain them for your personal documentation. The IRS advises keeping these records for a minimum of five years. Once you have completed this step, you have fulfilled your federal responsibilities.
Virginia state taxes for gambling
However, your journey is not yet complete. Old Dominion also claims its share of your winnings. To comply with state tax regulations, the VA Lottery deducts 4% from your winnings.
In Virginia, the state classifies all gambling winnings as income. Therefore, the tax rate you are required to pay is determined by the total amount of income you have earned from all sources throughout the tax year. Virginia employs a tax system that combines elements of both a flat and graduated tax rate. The specific amounts and rates for the year 2020 are as follows:
- $0-$3,000: 2%
- For amounts between $3,000 and $5,000, the fee is $60 plus 3% of the amount exceeding $3,000.
- For amounts between $5,001 and $17,000, the fee is $120 plus 5% of the amount above $5,000.
- For amounts equal to or higher than $17,001, the cost will be $720 plus 5.75% of the amount exceeding $17,000.
Residents of Virginia should report any gambling winnings on Form 760. If you happen to have won cash or a prize in a different state, and the gambling institution that awarded it withheld state income tax, you have the option to deduct that amount from your Virginia tax liability.
For that purpose, it is recommended to utilize a Schedule OSC. On Line 3, you need to report the total amount you won from gambling in other states, while any amount that has been withheld should be mentioned on Line 5. This process becomes quite straightforward once you have received your W-2G. However, not receiving one does not exempt you from the obligation to report.
What if I didn’t get a Form W-2G?
If you have accumulated gambling winnings throughout the year without receiving a Form W-2G from the casino, lottery, or sportsbook, your initial step should be attempting to connect with the respective entity. It is possible that there was an error or oversight in the process.
Reporting your winnings is still necessary, even if you did not receive a Form W-2G. It is important to note that in numerous instances, the applicable taxes have already been deducted from your winnings. Therefore, by reporting, you will not be augmenting your tax obligation.
Failure to report can put you in danger of underreporting, potentially leading to penalties and interest charges imposed by the IRS and/or the state.
What if I’m part of a group of people who hit a lottery jackpot?
If you joined forces with your co-workers or friends to purchase lottery tickets and your gamble turned out to be highly rewarding, there is a specific procedure designed for such situations. However, it does entail some effort on your part.
In order to proceed, please ensure you have Form 5754 readily available, along with some basic details about each individual within your group. Once you have successfully filled out the form, kindly make copies for each member and proceed to submit the original to the payer responsible for distributing your winnings.
The casino, lottery, sportsbook, and other establishments will utilize that document to generate W-2G forms for all members of the group. Please note that you should not include Form 5754 when submitting your tax return to the IRS. Instead, retain it for your personal records.
Can I deduct anything related to gambling?
Certainly, however, in order to do so, you will need to choose to itemize your deductions rather than opting for the standard deduction. By doing this, you will be able to deduct your gambling losses from your federal tax liability.
Please be aware that you are only allowed to deduct the exact amount you wagered and lost. It is not possible to subtract your losses from your winnings and report the remaining difference. Moreover, your losses cannot exceed your winnings for the year.
In order to claim deductions for your gambling losses, it is essential to maintain comprehensive records of your activity for a minimum of five years. These records should encompass lottery tickets, receipts for bets, as well as bank statements.
To easily keep tabs on your annual losses, consider enrolling in the rewards programs offered by online sportsbooks. These programs are not only free but also offer the benefit of providing you with an annual statement summarizing your activity.
After determining your annual total, enter it on Line 28 of Schedule A, Form 1040. It is important to note that this deduction applies only to your federal taxes, as Virginia does not permit the deduction of gambling losses.
Sports betting winnings and taxes
In the near future, residents of Old Dominion can expect the arrival of online sports betting, if not its availability in physical stores. It is important to note that if you earn more than $600 from betting on sports throughout a tax year, you are required to report your winnings to both the IRS and the state.
Similar to receiving a Form W-2G for casino and lottery winnings, you should also expect to receive one from the sportsbook(s) where you placed your bets. The process of reporting your sports betting earnings follows the same guidelines as reporting any other gambling winnings.
If you choose to itemize your federal deductions, you have the opportunity to deduct your losses from betting on sports. It is important to emphasize the significance of maintaining thorough records.
If you have any doubts or questions about gambling losses or winnings and how they relate to federal and state taxes, you can find numerous CPAs and tax attorneys in VA who specialize in providing assistance. Congratulations on your winnings, and make sure to enjoy them after taxes are taken care of!