With legal sportsbooks set to join the landscape of gambling in Arizona, it’s more imperative than ever for residents and visitors in the state to understand how gambling affects their income tax situation.
Simply put, if you gamble in Arizona and collect significant winnings, the entities you gamble with will withhold part of your winnings for tax purposes. This applies to winnings from the Arizona Lottery and casinos in the state as well. The Arizona Department of Revenue and the IRS consider your gambling winnings taxable income.
While accountants and other financial professionals can provide you with detailed solutions for your exact situations, there are some general guidelines when it comes to gambling and taxes in Arizona.
These include when your winnings qualify for taxes, how to report your winnings, how much to pay, and what you might be able to deduct. All this information is correct only in Arizona and for filing in 2021 for the tax year 2020.
Standard practice across the United States is for casinos, lotteries, and sportsbooks to withhold 25% of your winnings.
They will usually do this if they have your tax information, such as your Social Security number. In the absence of such information, they might withhold up to 28%.
While that could alleviate your liability, it also may not be sufficient. That depends on what rate you pay to the IRS based on all your income for the tax year.
Starting with the tax year 2017, the IRS has a withholding rate of 24% for gambling winnings of $5,000 or more over the course of a tax year.
Understand this is a cumulative total for the entire year. Qualifying winnings may include but aren’t limited to:
How do you report your gambling winnings and any amounts withheld to the IRS? In this case, Form W-2G, Certain Gambling Winnings is your best friend. It provides you and the IRS with the specific amounts on both your income and withholdings for the year from each specific gambling company.
If you had gambling winnings from more than one place during the year, you should get a separate W-2G form from each. While it’s your responsibility to make sure the gambling companies have the correct and necessary information, it’s on them to fill this form out and get it to you.
Gambling companies will send you a W-2G if your cumulative winnings for the year are within the following parameters:
After you’ve received all the pertinent Form W-2Gs, you have everything you need to report your gambling income and withholding for the year to the IRS.
As the lottery and tribal casinos in the state automatically withhold part of your winnings in accordance with gaming compacts and the law, your tax liability might already be covered. Therefore, there’s no benefit to underreporting your income. Risks include inviting an audit with possible consequences including fines and interest.
Reporting your gambling activity for the year to the IRS is quite simple.
When you report your activity, it’s crucial to remember that your winnings and withholding are what the IRS is interested in. Whether you made a profit gambling during the year is completely irrelevant.
Some taxpayers make the mistake of assuming that if they didn’t make a profit, they don’t need to report their winnings. Think of your gambling winnings like your gross wages from your employer. You have to report those amounts, not just the profit if you made any.
To do this, gather all your W-2Gs, if you have more than one for the year. The figures in Box 1 and Box 4 on each form are what you’re after. Box 1 is your winnings for the year. If you have more than one W-2G, add up all the Box 1 figures. Then, put that sum down on your IRS Form 1040, Schedule 1 as “Other Income.” Next, add it to other non-W2 employment sources of income you may have had from the year that qualify as “Other Income” on Line 8 of your Form 1040. You’ve now reported your winnings for the year.
Box 4 details any amounts withheld. Again, add up all those figures if you have more than one W-2G. That sum goes in with all the rest of your withholding for the year on Line 17, Federal Income Tax Withheld, on your Schedule 1. Attach the Schedule 1 to your 1040 before you file. When it comes to your W-2Gs, however, do not attach those. Keep them for your own records. With that, you have reported all your gambling activity for the year to the IRS.
There is no Arizona law requiring casinos and/or the lottery to withhold additional taxes from your winnings for the state. As a result, you may owe the state more than what was withheld. Arizona has a marginal income tax with four brackets, using your federal adjusted gross income as a base. Additionally, the procedures differ for residents and non-residents of the state.
If you are a non-resident of Arizona but win some money playing the lottery in the state or visiting a tribal casino, you may not see any withholding on your W-2G. That’s because the state has a filing requirement for non-residents of $15,000. Thus, if you didn’t collect at least that amount in winnings during the year, you may not have to file a non-resident return.
The important thing to remember, however, is that $15,000 applies to all your forms of Arizona income. For example, if you sold some property in the state during the year that netted you at least that amount, you would still need to file a non-resident return even though your gambling winnings didn’t meet the minimum.
For residents and non-residents alike, the income tax rates are the same. For the tax year 2020, the rates are the same but the triggering income levels differ based on how you file. If you file as single or married filing separately, this is your tax schedule:
If you are married and file jointly, file as head of household, or are a widow/widower in certain circumstances, this is your tax schedule for the tax year 2020:
It’s important to understand how marginal tax schedules work. For example, let’s say a married couple files jointly and made $150,000 in ordinary income during 2020. That couple would pay 2.59% on the first $52,999 of that income, 3.34% on all their income from $53,000 to $105,999, then 4.17% on the remainder of their income for the year. So their tax liability, without any deductions, would be:
If you are a full-time Arizona resident, there are a few different forms to consider. Note that some members of Indigenous peoples groups in the state will not have to file an Arizona tax return. That applies if all of the following are true in a tax year:
Arizona residents should use Form 140 if their taxable income for the year is $50,000 or more or they want to itemize deductions. If their taxable income is less than $50,000 for the year or they want to take the standard deduction, they can use either Form 140A or 140EZ. Non-residents should use Form 140NR.
If you have IRS 1040, reporting your gambling income to the state is quite simple. The Arizona Department of Revenue uses your federal adjusted gross income as a starting point to determine your taxable income. That amount already contains your gambling winnings. All you have to do, then, is transfer federal adjusted gross income (Line 11 on your IRS Form 1040) to Line 12 of your AZ Form 140 or 140A. At that point, you’ve reported your winnings to the state.
As far as reporting amounts withheld goes, this is where you need to scrutinize your W-2G forms a bit more. In Box 13, State/Payer’s state identification no., if the text reads any jurisdiction other than AZ or Arizona, do not include that form in your withholding reporting. For any W-2G forms you may have that do show AZ/Arizona, you need to include the amount(s) in Box 14 in your AZ withholdings. Again, if you have more than one such form, total all the figures from the appropriate Box 14s.
You would then add that sum to all the rest of your Arizona withholding for the year, which goes on Line 24 of your Form 140 or 140A. Unlike with your federal return, you do need to attach your W-2G(s) if you claim tax withheld from them. Make copies for your records prior to doing so, however.
For the 140NR, you would put your total of the amounts from Box 1 of your AZ-only W-2G forms on Line 22, Other Income Reported on Your Federal Return. If you have any amounts in Box 14 of the same W-2Gs, you would add those figures to the rest of your AZ income tax withheld and put that sum on Line 62. At that point, you’ve fulfilled your responsibilities.
If the tax deadline is approaching and you are still missing a W-2G you believe you should have received, the first thing to do is contact the gambling company you believe owes you one.
There may have been some error like an incorrect address that precluded the form from reaching you. Either way, not receiving a W-2G does not alleviate your responsibility to report your income correctly.
Your best bets to do so are bank statements and receipts from your gambling activity from the year. Player loyalty/rewards programs statements can also be of great benefit here.
Yes. If you are part of an Arizona Lottery pool or put your money together with some friends to stake yourselves in a poker game, you will want to get an IRS Form 5754.
Designate one person in the group to fill it out, make copies for everyone, then submit it to the prize grantor. With the information on the form, the entity that granted the prize can get a correct W-2G to everyone in the group.
With that, it’s standard procedure for everyone in the group from there.
That may be the case on the federal level but not with the state of Arizona.
You can deduct gambling losses from your federal taxable income. However, there are some things to note when considering this. First, you must opt to itemize your deductions. For that reason, it only makes sense to do this if the sum of your itemized deductions for the year are greater than the federal standard deduction. Another thing to remember is that you can only deduct your losses up to the point of your winnings, regardless of whether you took a loss for the year.
Finally, you can’t deduct any related expenses like the cost of your hotel stay or food while you were playing. On Schedule A of Form 1040, you’ll put your gambling losses on Line 28. Should you go for this option, keep detailed records of your gambling activity. This is another area where loyalty programs can be very helpful. Bank statements and receipts are crucial as well.
Both the Arizona Department of Revenue and the IRS have resources for taxpayers with questions.
Both agencies stress that the process of seeking assistance will go much smoother if taxpayers are prepared. Thus, you need to have all your W-2G forms, your personal information, and proof of your gambling losses on hand.
If you win prizes playing multi-state lottery games like Mega Millions or Powerball, the Arizona Department of Revenue considers them no different than prizes won playing AZ-only lottery games.
The procedure for reporting your winnings from them is identical. That goes for the IRS as well.
The lottery is just another form of gambling in the eyes of the state and the IRS.
You should receive a Form W-2G from the lottery if you win a prize of $600 or more. Additionally, the Arizona Lottery should withhold part of your winnings for tax purposes.
In many cases, it’s wise to consult with financial and legal professionals before you claim your prize. Those professionals may be able to devise strategies to limit how much tax you pay.
If you win a boat, car or trip from a casino or in a sweepstakes, that’s taxable income in the eyes of the Arizona Department of Revenue and the IRS.
You should get a Form 1099 from the prize grantor that states the fair market value of your prize. You would include that with any other 1099 income on Line 21 of your IRS Form 1040. That goes into the federal gross income you use on your state returns.