Winning the lottery. It is something you probably dream about doing. You are certainly not alone. How would you feel if you walked into a casino, dropped your quarter in a machine and won the $8 million jackpot? Now, how would you feel if the casino took it back?
That is exactly what happened to one woman. She put $100 into a slot machine and won the coveted jackpot. A casino official told her that the machine wasn’t supposed to pay out just yet, that the machine had malfunctioned. The official told her that the malfunction voided the $8 million win. Adding what seems like insult to injury, the casino only refunded $80 of the total money she put into the machine.
The situation seems so unfair, but the machine does have a clear sticker attached. It warns users “any malfunction will void all pays and plays.” The story has unsurprisingly caught media attention, prompting a debate over the casino’s legal basis for recalling the jackpot.
Even if the law backs the casino, you might find the entire situation unfair from a moral or customer service standpoint. Did you know that you never get to keep it all? Even when you get to walk out of the front door with your millions of dollars, there is one other party who will come calling for its share.
We are talking about the Internal Revenue Service. Gambling winnings, whether won at a casino, through Powerball or in a poker tournament, is taxable income. Forms W-2G and 5754 are going to be the applicable documents or the “buzzwords” you’ll need to know.
Like almost every other aspect of the tax code, the rules surrounding gambling winnings are not entirely clear. For instance:
- You report. Businesses withhold. Like sales tax, gambling establishments or payers are required to withhold a certain amount of winnings for taxes under certain conditions. You have to report them on your income tax return, again, under certain conditions.
- Not all winnings are treated equally. The establishment will withhold a percentage if you win $1,200 or more from a slot machine, $1,500 or more in a keno game or $5,000 or more in a poker game.
- You don’t have to count the money you paid in every instance. The ante in a poker game or coins in a slot machine do not count toward the reporting thresholds listed above.
- The winnings are not always taxed at the same rate. In general, you will only get to take home 75 percent of the amount you won. The establishment may also withhold 28 percent (instead of 25 percent) as “backup withholdings” in some situations. Yes, that is an official term.
- You have to pay taxes on the noncash awards too, like the cars Oprah gives away. You get to keep the car, but you owe tax on the fair market value of the car. If the value is more than $5,000, the tax is generally 25 percent.
We just named five unique rules. Each situation involves an “it depends” answer. There are many more rules to consider and many exceptions to those rules. We have not even mentioned the subject of state-specific tax laws in this post.
Any recipients of lottery or gambling winnings are required to report applicable amounts on their tax returns. Any business that gives awards, prizes, cash payments or gambling jackpots is obligated to follow these rules as well. Are you ready to hire an attorney yet, so that you don’t lose more money than the IRS has the right to take?