Although not many people consider the possible tax consequences of their actions when heading off to a casino for a casual night of gambling, there are important repercussions that all taxpayers should keep in mind. For instance, some types of gambling winnings must be reported as income to both the Internal Revenue Service (IRS) and the state.

FEDERAL LAW

Those who are not in the business of gambling, but are casual gamblers, are still required to report their winnings as part of their income on tax returns. This includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. Furthermore, cash winnings are not the only form of gambling income that must be reported, as the fair market value of other non-cash prizes, such as trips, houses, bonds, and cars, must also be reported on Form 1040 as “other income.”

Gambling winnings are usually subject to a flat tax rate of 25 percent. However, winnings of more than $5,000 are subject to income tax withholding if they are from one of the following sources:

• Sweepstakes;
• Wagering pools, including payments made to poker tournament winners;
• Lotteries; and,
• Any other type of wager, as long as the proceeds are at least 300 times the amount of the original bet.

Winnings from a number of sources are exempt from income tax withholding, including gambling winnings from:

• Bingo;
• Keno; and,
• Slot machines.

STATE LAW

In New Jersey, all gambling winnings, whether the result of illegal or legal gambling, are subject to the state's gross income tax. However, only lottery prizes in amounts exceeding $10,000 are taxable as gross income. Winnings collected by non-residents from lottery or wagering transactions in the state are also considered income, meaning that they are similarly subject to the state's gross income tax.

Taxpayers are also permitted to deduct all types of gambling losses from their total winnings during the same tax period. This may require the submission of additional substantiating evidence of the losses, including:

• Losing race track tickets;
• Losing lottery tickets;
• A daily log or journal of wins and losses; and,
• Canceled checks or notes.

Taxpayers should keep this type of evidence for at least six years after filing.

CONTACT US TODAY TO SPEAK WITH AN EXPERIENCED NEW JERSEY TAX ATTORNEY

Determining what should be reported as income can be difficult and even minor mistakes can have serious consequences. In fact, we are currently appealing a case before the New York State Tax Appeals Tribunal on the issue of taxable gambling income. If you live in New Jersey and have concerns about filing tax returns, please contact the Kridel Law Group at (973) 470-0800.