What Rate Are Gambling Winnings Taxed At

The IRS requires U.S. Nonresidents to report gambling winnings on Form 1040NR. Such income is generally taxed at a flat rate of 30%. Nonresident aliens generally cannot deduct gambling losses.

December 11, 2008	2008-R-0673
STATE INCOME TAX ON NONRESIDENTS' GAMBLING WINNINGS
By: Judith Lohman, Chief Analyst

You asked (1) whether legislation has been proposed recently to impose the state income tax on nonresidents' gambling winnings at Connecticut casinos; (2) if so, which legislators proposed the bills; and (3) whether other states with casinos impose their income taxes on nonresidents' gambling winnings.

SUMMARY

Under current law, nonresidents who have gambling winnings from Connecticut are subject to Connecticut income tax on those winnings only if they win the money in Connecticut's state-run lottery. Nonresidents' casino and pari-mutual winnings are not subject to the state income tax.

Bills to subject nonresidents' Connecticut casino winnings to the state income tax were proposed in 2005, 2007, and 2008. All three were sponsored by Rep. Shawn Johnston. All were referred to the Finance, Revenue and Bonding Committee, which did not act on them. In 2002, the General Assembly passed a law to impose Connecticut income tax on nonresidents' casino winnings over $5,000, but it repealed the provision a short time later before it could take effect. The 2002 laws were included in large emergency certified budget implementing bills.

A computer survey of 16 selected states with both state income taxes and casino or pari-mutuel gambling found that 15 impose state income taxes on nonresidents' winnings in those states. Of the states surveyed, only New York follows Connecticut's example in excluding nonresident casino and pari-mutuel winnings from its state income tax.

CONNECTICUT INCOME TAX TREATMENT OF NONRESIDENTS' GAMBLING WINNINGS

People who are not Connecticut residents do not have to pay Connecticut income taxes on non-lottery gambling winnings in the state. By law, nonresidents owe Connecticut income tax only on Connecticut state lottery winnings exceeding $5,000. Winnings from all other types of gambling in the state are tax-exempt for nonresidents, including winnings from casino games, slot machines, pari-mutuel wagering, raffles, or other types of gambling occurring in Connecticut (CGS § 12-711 (b)). By law, such winnings are not considered to be derived from Connecticut sources for purposes of imposing the state income tax on those who do not live here (Department of Revenue Services, Informational Publication, IP 2005 (15), issued 10/20/05).

RECENT LEGISLATION ON NONRESIDENTS' CASINO WINNINGS

The distinction between nonresidents' Connecticut income tax liability for Connecticut lottery winnings and other types of gambling income has existed since 2001. PA 01-6, June Special Session, imposed the Connecticut income tax on a nonresident's winnings of more than $5,000 in a lottery run by the Connecticut Lottery Corporation. The change took effect on July 1, 2001 and applied to tax years beginning on or after January 1, 2001. Until that time, nonresidents were not subject to Connecticut's income tax on any Connecticut gambling winnings. The 2001 change was passed as part of a large emergency certified bill that included many tax changes.

In the May 9 Special Session in 2002, the General Assembly at first extended the income tax to also cover nonresidents' winnings over $5,000 from all other gambling activities that take place within Connecticut's borders, including at casinos on Indian reservations within the state (PA 02-1, May 9 Special Session, § 81). It changed its mind a short time later and passed another act to repeal the extension (PA 02-4, May 9 Special Session, § 17). Both sections were included in emergency certified bills implementing the state budget.

Since 2002, three proposed bills have been introduced to extend the income tax to the casino winnings of nonresidents. All were introduced by Representative Shawn Johnston of the 51^st district. The bills were:

● HB 5949 (2005 Session) - An Act Concerning Taxation Of Out-Of-State Residents' Casino Winnings (co-sponsor: Rep. Nafis, 27^th district)

● HB 6238 (2007 Session) - An Act Concerning Taxation Of Out-Of-State Residents' Casino Winnings

● HB 5408 (2008 Session) - An Act Concerning Taxation Of Out-Of-State Residents' Casino Winnings

All three bills were referred to the Finance, Revenue and Bonding Committee, which took no action on them.

OTHER STATES

A computer survey of income tax provisions of 16 selected states shows that 15 impose state income tax on nonresidents' non-lottery gambling winnings from within their states (see Table 1). According to the American Gaming Association's (AGA) 2008 Survey of Casino Entertainment, 13 of these states have casino gambling at commercial or racetrack casinos, Indian tribal casinos, or in the form of video lottery terminals. The other three states have noncasino forms of pari-mutuel wagering, such as horseracing. The only state in our survey that does not tax nonresidents' winnings from these forms of gambling is New York. The remaining states tax winnings, although some require winnings to exceed a certain threshold or allow nonresidents to offset winnings with losses.

The state with the highest number of casinos according to the AGA survey is Nevada, which is not included because it has no state income tax.

Table 1: State Income Tax on Nonresidents' Non-Lottery Gambling Winnings

*State*	Number of Casinos*	Casino Types*	Other Non-Lottery Gambling*	*State Income Tax on Nonresident Winnings from Casinos or Other Non-Lottery Gambling+*
Arizona	25	Tribal	Pari-mutuel	Yes. Winnings subject to state withholding at 20% of federal withholding. Losses are deductible from winnings.
Connecticut	2	Tribal	Pari-mutuel	No
Iowa	20	Commercial Racetrack Tribal	Pari-mutuel	Yes, if winnings are greater than $1,000 and gross income is greater than $9,000 if single and $13,500 if married filing jointly.
Louisiana	25	Commercial Racetrack Tribal	Pari-mutuel	Yes
Maryland	0	NA	Pari-mutuel	Yes, if the amount is greater than $500. Maryland withholding tax applies to winnings that are greater than $5,000. State withholding on nonresident winnings is 6.75%. Losses are not deductible from winnings.
Massachusetts	0	NA	Pari-mutuel	Yes. Losses are not deductible from winnings.
Michigan	22	Commercial Tribal	Pari-mutuel	Yes
Minnesota	35	Tribal Card room	Pari-mutuel	Yes. Losses are deductible from winnings.
Mississippi	31	Commercial Tribal	None	Yes. A nonrefundable 3% tax is withheld from all nonresidents' winnings required to be reported to the IRS.
New Jersey	11	Commercial	Pari-mutuel	Yes. New Jersey losses are deductible from New Jersey winnings.
New Mexico	26	Racetrack Tribal	Pari-mutuel	Yes. Winnings are subject to state withholding equal to 6% of federal withholding. Losses are deductible from winnings.
New York	16	Racetrack (video lottery terminals) Tribal	Pari-mutuel	No
North Dakota	6	Tribal	Pari-mutuel	Yes
Pennsylvania	11	Commercial Racetrack	Pari-mutuel	Yes
Rhode Island	2	Racetrack (video lottery terminals)	Pari-mutuel	Yes
Virginia	0	NA	Pari-mutuel	Yes, if the wager is placed or paid from a Virginia location.
Wisconsin	28	Tribal	Pari-mutuel	Yes. Expressly includes winnings from a casino or bingo hall located in Wisconsin and operated by a Native American tribe or band.

* Source: American Gaming Association

+ Source: State tax department websites

JL:ts

The glittering lights and ringing bells of the casino. The dream of winning the lottery. Gambling can be a lot of fun for most people, and when your number finally comes up -- well, isn't that the whole point?

Of course, we all want to go home big winners with a wad of cash in our pockets. However, once you win, the IRS does, too. In fact, they expect and require you to report your gambling winnings. Gambling winnings (which the IRS refers to as 'income') can include:

Lotteries
Raffles
Horse/dog races
Noncash prizes -- like cars, trips or houses

What you need to report depends on how much you win, what type of gambling you were doing, and the ratio of your winnings to your wager.

Typically, you'll receive paperwork from the casino (or other source of your payout) to complete if you win a certain amount. You must provide your Social Security number and fill out IRS Form W-2G. This form is called 'Certain Gambling Winnings,' and allows you to report your winnings as income to Uncle Sam. You'll receive that paperwork if you win:

$600 or more from the state lottery, horse or dog races, jai alai or other wagering (but only if the winnings are 300 times the original wager)
$1,200 or more at a slot machine or bingo
$1,500 or more on keno (minus the amount you spent on tickets for the winning game)
$5,000 or more in poker tournaments

Typically in a winner situation of $5,000 or more (no matter what the game), the payee will not only require you to fill out the above-mentioned forms, but will also take 25 percent of your winnings up front to give directly to Uncle Sam [source: Bell]. If you refuse to fill out the form or provide your Social Security number, most establishments will take 28 percent of your winnings, in accordance with federal law [source: IRS].

You don't have to fill out the W2-G form for winnings on table games, including craps, blackjack, pai gow, baccarat and roulette. However, you still have to report those winnings when you file your regular income tax in April. On form 1040, on the 'Other Income' line (line 21) you report any other winnings, like prize or award money.

Here's where things can get a little more complicated. Just as you report your winnings to the IRS, you can also report your losses. On line 28 of form 1040, 'Other Miscellaneous Deductions,' if you have any gambling losses, note them there. However, your losses can't exceed your winnings. It's also important to note that you'll only want to do this if you're already itemizing your deductions and will end up deducting more than the standard [source: IRS]

All of this information illustrates why it's crucial to keep detailed records of your gambling -- both wins and losses -- especially if you do it often . Signing up for a player's card at a casino is a great idea, because the casino keeps an electronic record for you to easily access [source: Taxpertise].

The takeaway here is that the IRS treats any gambling or contest winnings as income. You should report all of it, even if the casino or other payee doesn't hand you a tax form to fill out. State tax laws apply too so be sure to check with your state's department of revenue to determine your liability [source: Ritchie].

State Tax On Gambling Winnings

Sources