As the 2019 NFL season began this September 5, more states are legalizing sports betting with an estimated 38 million people betting on the NFL games. However, winners will face taxation before they can take home their earnings.
The NFL opens its 100th season Thursday with the Green Bay Packers against the Chicago Bears, airing on NBC. Many sports fans may rejoice with the legalization of sports betting in their state; however, they should be aware of the taxes that they will face.
Winnings, no matter how big or small will be subject to taxes. The percentage that Uncle Sam will take out will depend on how much money you win. “The way it works is that any income from gambling is taxable income,” says Cari Weston, CPA, and director of tax practice and ethics for the American Institute of CPAs.
“It’s taxable regardless of how much you won or where you won it.” If people win money via unregulated channels, they would have to declare the sum during tax season or face consequences from the IRS.
With the legalization of sports betting for 13 states now, more people will bet legally on the NFL games for the 100th season. The number went from 5.8 million to 7 million people, with five other states expected to legalize betting as the season progresses.
If not legally, people are betting with their family and friends or through contests and betting pools online. Otherwise, for legal betters, they will place their bets through regulated betting. The IRS will put reporting requirements on the betting center to make things easier for all betters.
How your winnings may be taxed
Moreover, if your winnings are more than $5,000 or a value that is 300 times higher than your original bet, the payor (i.e. sports betting center) needs to withhold 24% of that for federal taxes. Even if your pot is under that amount, there may be instances that can make the payor still withhold tax.
Betters be warned: the final taxes may be higher or lower than the tax on your winnings, which can depend on your main income streams. The rule for taxes still remains the same even if there is no tax withheld to your winnings. You still have to claim it on your income tax return.
A silver lining in this taxation, however, is that you can deduct your gambling losses to decrease your pot. If you reduce your winnings, your taxes will be indefinitely lower. Still, this doesn’t mean that winners can deduct an amount that’s higher than your winnings. Winners should also be prepared to prove their claims in case the IRS asks for documentation.
If you wish to have a tax break for your gambling losses, you can only do so if you have your deductions itemized. The standard deduction doubled under the newest tax law that was declared in 2018, so not itemizing may not be financially better for you.
What you can expect with the new taxation
If you win $600 or 300 times the amount of your original wager, you may be given a W-2G tax form where you placed your bet. On the other hand, for fantasy sports betting, you will be given a 1099-MISC form instead of the W-2G. These forms will be sent to the IRS, and if betters don’t report winnings, they will most likely be questioned.
For professional gamblers, it’s quite a different story. When computing for gambling losses, related expenses should be included (such as travel expenses to and from the casino) in this part rather than in business expenses.
“Don’t just cash the check and spend it,” Weston says. “Sit down with a CPA or financial planner and make a plan for the money first.”
If professional gamblers win big, it’s best to consult with a professional first before spending all of the pot. Aside from making sure that they have enough money to cover additional taxes, accountants can make sure you won’t burn through the money in future tax hiccups.