Lottery and Gambling Winnings
Winning the Lottery or scoring on a sports wager can change your life in profound ways. Congratulations on your lucky break!
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Just remember that your good fortune includes a responsibility to pay taxes and fees on those winnings.
Gambling Winnings:
In 2018, Governor Phil Murphy signed a law that authorized legal sports betting in New Jersey. The law (A4111) allows people, age 21 and over, to place sports bets over the internet or in person at New Jersey's casinos, racetracks, and former racetracks. Sports betting is now among the many forms of gambling winnings that are subject to the New Jersey Gross Income Tax, including legalized gambling (sports betting, casino, racetrack, etc.) and illegal gambling.
Lottery:
New Jersey Lottery winnings from prize amounts exceeding $10,000 became subject to the Gross Income Tax in January 2009.
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Withholding Rate from Gambling WinningsNew Jersey Income Tax is withheld at an amount equal to three percent (3%) of the payout for both New Jersey residents and nonresidents (N.J.S.A. 54A:5.1(g)).
Withholding Rate from Lottery Winnings
The rate is determined by the amount of the payout. If a prize is taxable (i.e., over $10,000), the entire amount of the payout is subject to withholding, not just the amount in excess of $10,000. The withholding rates for gambling winnings paid by the New Jersey Lottery are as follows:
- 5% for Lottery payouts between $10,001 and $500,000;
- 8% for Lottery payouts over $500,000; and
- 8% for Lottery payouts over $10,000, if the claimant does not provide a valid Taxpayer Identification Number.
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Companies that obtain the right to Lottery payments from the winner and receive Lottery payments are also subject to New Jersey withholdings. Each company is required to file for a refund of the tax withheld, if applicable.
LotteryNew Jersey Lottery winnings from prize amounts exceeding $10,000 are taxable. The individual prize amount is the determining factor of taxability, not the total amount of Lottery winnings during the year.
- For example, if a person won the New Jersey Lottery twice in the same year, and the winning prize amounts were $5,000 and $6,000, these winnings would not be subject to New Jersey Gross Income Tax. However, if that person won the Lottery once and received a prize of $11,000, the winnings would be taxable.
- This standard for taxability applies to both residents and nonresidents.
- The New Jersey Lottery permits donating, splitting, and assigning Lottery proceeds to someone else or to a charity. If you choose to donate, split, or assign your Lottery winnings, in whole or in part, the value is taxable to the recipient in the same way as it is for federal income tax purposes.
Making Estimated Payments
If you will not have enough withholdings to cover your New Jersey Income Tax liability, you must make estimated payments to avoid interest and penalties. For more information on estimated payments, see GIT-8, Estimating Income Taxes.
Out-of-State Sales:
Out-of-state lottery winnings are taxable for New Jersey Gross Income Tax purposes regardless of the amount.
Gambling winnings from a New Jersey location are taxable to nonresidents. Gambling includes the activities of sports betting and placing bets at casinos and racetracks.
Calculating Taxable Income
You may use your gambling losses to offset gambling winnings from the same year as long as they do not exceed your total winnings. If your losses were greater than your winnings, you cannot report the negative figure on your New Jersey tax return. You must claim zero income for net gambling winnings. For more information, see TB-20(R), Gambling Winnings or Losses.
You may be required to substantiate gambling losses used to offset winnings reported on your New Jersey tax return. Evidence of losses can include your losing tickets, a daily log or journal of wins and losses, canceled checks, notes, etc. You are not required to provide a detailed rider of gambling winnings and losses with your New Jersey tax return. However, if you report gambling winnings (net of losses) on your New Jersey return, you must attach a supporting statement indicating your total winnings and losses.
Reporting Taxable Winnings
Include taxable New Jersey Lottery and gambling winnings in the category of “net gambling winnings” on your New Jersey Gross Income Tax return.
Tax Day is right around the corner, and sports wagering winnings should be part of a bettor’s annual filing.
Nathan Rigley, a lead tax research analyst at H&R Block, spoke with TheLines.com to offer advice for bettors making preparations for 2018 and beyond.
The first thing to realize is that any winnings are taxable and bettors should include it on a tax return.
“Just because a taxpayer doesn’t receive a tax form, (it) does not make the winnings tax-free,” he said. “Taxpayers still have a responsibility to report their prize on their tax return as ‘other income.’”
Don’t neglect to report it
Don’t be caught unaware. No matter the amount, gambling winnings are taxable. Those winning a substantial amount are likely to receive a tax form, and the IRS will also receive that form.
Those winnings will usually be reported via form W-2G or 1099-Misc. The IRS will then compare the information to the taxpayer’s return. Not reporting can be costly, triggering penalties and interest.
“Failing to report the prize as income is the surest way to get audited,” Rigley said.
That could certainly be uncomfortable and cause the type of scrutiny most bettors would like to avoid.
Record keeping 101
Serious bettors must not only be savvy with betting lines, but also with record keeping. The IRS advises gamblers to keep an accurate diary or record to substantiate wins and losses on a tax return.
Plan to keep track. A little extra work can pay big dividends in the long run. Rigley recommends bettors include the following in their records:
- The date and type of each wager.
- The name and location of the bet.
- The names of other people with the bettor at the betting establishment.
- The amount won or lost.
Bettors should also keep verifiable documentation of losses, which include:
- Wagering tickets
- Canceled checks
- Credit card records
Mobile wagering makes keeping track of wagers much easier. Players should have easy access to bets made throughout the year. That helps in reporting overall wagering income.
Track those wins and losses
Bettors should keep track of their winnings, but also their losses. If they won big and show a profit for the year, they can offset winnings with losses to help lower a tax burden.
Only winners can deduct losses, and the full amount of winnings and losses must be reported when filing. However, Rigley notes that gamblers may deduct losses, but only by as much as they report in winnings.
For example, suppose a taxpayer entered two betting pools: One at the office and one among friends. Both had a $10 entry fee, and the player won $100 from the office pool. The bettor should report $90 in winnings, deducting the $10 fee.
For itemizing, the entry fee from the losing pool and other gambling losses could be taken as an itemized deduction. That would be capped, however, at a maximum of the amount won being reported, in this case, $90.
Do the new tax laws have any impact?
Taxpayers will notice some changes when filing this year. The Tax Cuts and Jobs Act changed many aspects regarding itemized deductions. That includes the elimination of some deductions that were subject to a 2% floor of adjusted gross income.
“This has been impactful for many taxpayers,” Rigley said. “Luckily, the deduction for gambling losses, though a miscellaneous deduction, was not subject to this floor.”
This is advantageous to gamblers. They can continue to claim gambling losses as an itemized deduction to the extent of their gambling income.
Sports betting as a full-time job
The majority of bettors may fall into the recreational or hobby group. But those who bet professionally as their sole means of earning a living have different benefits and requirements.
These bettors would need to file as a business with a Schedule C form.
Filing as a business allows deducting expenses, but also subjects them to self-employment tax and possibly quarterly estimated payments. It’s as if that bettor runs his or her business and files accordingly.
The new tax laws have had some changes on this aspect, however. Bettors can no longer deduct non-wagering business expenses in excess of net wagering income. Thus, reporting a loss as a gambler isn’t possible.
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Planning for next year
The new sports betting landscape has brought many more into the wagering ecosystem. Players new to betting may want to start planning for filing their 2019 taxes.
Rigley strongly advises maintaining detailed gambling records.
“The foundation of any tax return is one’s records,” he said. “In order to ensure the best outcome on the tax return, you have to make sure you can back up anything reported on your return, including the reporting of inherently personal activities like gambling.”
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And if you do make a nice score, Rigley suggests making that first check to the tax man.
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Set aside an estimated payment on taxes you’ll owe on those winnings.
“This is essentially a deposit toward your tax liability,” he said. “The reason we suggest this is that it helps to avoid any underpayment penalties for failing to deposit enough taxes throughout the year. And, psychologically, it seems easier to write that check when the income is new rather than be hit with the balance due down the road when the return is filed.”
Here’s hoping that big win comes, though bettors should plan on paying Uncle Sam.