By now you may have taken the plunge and tried gambling, either in a physical casino or online. Online casinos and sportsbooks have taken the state by storm, and if you've been lucky enough to cash in on gambling or lottery activities, you'll want to be sure you're taking care of your tax liability.
If you've won any kind of a cash prize, that's considered taxable income, the same as if you brought it home from work. That includes any kind of cash gambling: slot machines, table games, sports bets, lottery, poker tournaments, horse racing or more. And if you come home from the casino with non-cash prizes like vehicles or vacation packages, you'll be taxed at fair market value for the noncash prize.
Keep in mind that tax professionals do this for a living. If you think you may need a tax pro or a CPA to sort all this out for you, you're probably right.
The state tax implications of gambling winnings are reasonably straightforward as far as these things go since Pennsylvania has a flat income tax. The federal income tax is a little stickier, but we'll break everything down for you as best as we can below. For state taxes, you can use this handy calculator to help you find out what you owe, if anything.
Gambling winnings are fully taxable income by both the Internal Revenue Service and the Pennsylvania Department of Revenue. Depending on how much you've won, you may have received a W-2G form indicating the withholding from the operator. Even if you did not receive this form, it's up to you to report any gambling winnings to the feds and the state.
Gambling income includes any profits you made through promotions, which means it's vital to keep accurate records. The fair market value of the free spins, credits or merchandise is considered income, the same as if it was a cash prize. If you're a sports bettor, some of those promos can be very valuable, so keep close tabs on any promotional offers and remember to note them on your return.
There are a handful of separate rates to be aware of. It breaks down like this:
So the W-2G should come to you in the mail toward the end of January if certain gambling winnings hit monetary thresholds. When doing your federal taxes, list the value of the total winnings (including non-cash prizes) on Form 1040, Schedule 1, Line 8. For state reporting, list the winnings separately on PA-40, line 8, Schedule T. If you're a resident of Pennsylvania and won out of state, those winnings are still subject to the Pennsylvania state taxes.
If you don't get the form W-2G in the mail, you still have to report your gambling and lottery winnings. Gambling is fun, but underreporting your taxable income is risky. Online operators should have a section of your account where you can look up your wins and losses, so there's no reason to keep your gambling winnings off your Form 1040 and your PA-40 state income tax return.
Here's the good news. You can deduct gambling losses, but there are a few things to keep in mind. First off, the losses you deduct are dependent on your winnings. If you won $1500 and lost $6000, you can only deduct losses equal to the $1500 you won. And you can only deduct gambling losses if you itemize your deductions. Again, record-keeping is important here. You may be asked to provide evidence of the losses you're claiming, so make sure you have the following:
Pennsylvania lottery winnings are also taxable income. You'll get a W-2G form if you win more than $600, while if you win more than $5000, the PA Lottery will withhold for you automatically.
If you and the gang at the office raked in a big lottery jackpot and split it, you're still on the hook. When the winning ticket is cashed, the individual who receives the winnings will need to fill out IRS Form 5474, which indicates how much in lottery winnings the group has won. When the recipient fills out the form, he or she would list the tax information, such as the Taxpayer Identification Number (ITIN), of all others in the group of winners. Submitting this forms triggers the delivery of a W-2G Form to everyone in the group and allows the IRS to get its cut.
Multistate lottery prizes, like Mega Millions or Powerball, are just as taxable as any other. And if the ticket was purchased in the Keystone State, prize money is considered Pennsylvania source income since it was awarded by the Pennsylvania State Lottery. If you were part of a group lottery pool with people from out of state, both you and the nonresidents are still subject to PA state taxes.
If you don't report your PA gambling winnings, you're taking a more significant risk than betting against 'Nova in the first round of the Big Dance. If you get caught, the best-case scenario is you get hit with penalties and interest payments from the IRS, which would put a real damper on your gambling successes.