So, you've made a bit of money betting on sports this year. That's great, just don't forget to give Uncle Sam his cut.
At the beginning of 2022, sports betting became legal in the State of New York. In the opening five weeks DraftKings, FanDuel, Caesar's and others sportsbook agencies registered over one million new users as wagers neared $2.4 billion.
If you've had lady luck on your side, here are a few questions you may be asking yourself:
Are my winnings taxable and how does the IRS know how much I won?
Yes. Gambling winnings are fully taxable and you must report the income on Schedule 1 of your tax return. If your net winnings at the end of the year are $600 or greater, you can expect to receive a form W2G from the sportsbook agency reporting your winnings. The IRS will also receive a copy.
What if I also lost some bets, are those losses deductible?
Yes, but only if you itemize your deductions on Schedule A. The IRS allows you to deduct gambling losses to the extent of your gambling winnings.
For example: Say that in 2022, you have gambling winnings of $5,000 and gambling losses of $3,000. You will be able to benefit from deducting all $3,000 of your losses.
Now, assume winnings of $5,000 and losses of $7,000, you would only be able to deduct $5,000 of those losses (up to the extent of your winnings).
What if I take the standard deduction and don't itemize. Am I all out of luck?
If you do not itemize your deductions because the standard deduction is more beneficial to you, you will not be able to deduct your gambling losses. However, there are ways to take those winnings and turn them into a deduction.
I like deductions, tell me more....
A strategy that may work for some taxpayers is using those winnings and making a deductible contribution into a retirement account. Using the example above where you win $5,000 and you do not itemize, all $5,000 of your winnings would be subject to tax.
To counteract this income, you might consider using the funds to make a $5,000 contribution to a traditional IRA. You may receive a $5,000 deduction essentially offsetting your $5,000 gambling winnings while benefitting from putting money away for retirement.
It is always important to consult with your CPA to review your specific gambling winning tax implications and establish the best plan to minimize your tax exposure.
Kelvin J. Garcia, CPA
(516) 234-8621