The Tax Liability of Winning Raffles
The Tax Liability of Winning Raffles. Gambling income is always taxable, even if you win as little as $1. The amount of taxes you have to pay depends on your tax bracket. Even when gamblers are considered "hobbyists," as is the case with most, they must pay taxes on their winnings. "Professional" gamblers, those who derive most of their income from games of chance and pursue it as their trade, should pay social security and Medicaid taxes on their winnings, and keep detailed records of their transactions.
When you win a raffle, your tax liability depends on your tax bracket. If you are included in the 15 percent income bracket, for example, you pay 15 percent of your gambling winnings to the IRS. Those who are considered "professional" gamblers should also pay Medicare and social security taxes on their winnings; casual "hobbyist" gamblers do not pay such taxes. There are no exact requirements to qualify as a professional gambler, only that you derive most of your income from gambling and pursue the activity as your trade, such as by keeping good records. The income tax brackets change from year to year. In 2011, the first $8,500 in income is only taxed at 10 percent and the next $26,000 at 15 percent. Gambling income is always taxable, even if you win only $1.
Federal Withholding Taxes
The IRS has different rules for withholding for each game. If you win at least $600, and 600 times your wager, in a sweepstakes, lottery or wagering pool, the organizer must file a W-2G with the IRS. If you win at least $5,000, minus the wager, the operator must withhold 28% of your winnings for federal taxes or 31% if you fail to furnish a taxpayer identification number, such as your social security number (SSN). For example, if you pay $500 to enter a raffle and win $6,000, you must withhold taxes on $5,550 x 0.28 or $1,460, assuming you have provided your SSN.
If you win a non-cash item from a raffle, such as a car, you must withhold tax when the asset's fair market value exceeds $5,000 minus the wager. If you pay the withholding tax, the IRS imposes a rate of 28 percent minus the wager. If the payer pays your withholding, the rate is 38.88 percent minus the wager.
The IRS generally treats gambling income as if is a hobby, which means you can only deduct losses up to your winnings. The gambling deduction is a miscellaneous expense reported on Section A of your tax return, but not subject to the usual two percent adjusted gross income (AGI) limit. (Most miscellaneous expenses reported on Schedule A are not deductible until they exceed 2 percent of your gross income.) However, you must itemize your return to file Schedule A, so you cannot choose the standard deduction.
- IRS.gov: Instructions for Forms W-2G and 575
- Bankrate; Reporting Gambling Winnings; Kay Bell; February 2011