While a vast majority of us will never win the lottery, it can be nice to dream about what we would do with such a windfall. Yet, even if we just have a small amount of lottery winnings, we still need to report them to the IRS. If you have specific questions regarding reporting your lottery winnings, consult with your tax professional or accountant, such as Total Refund in Chicago, IL. However, since those winnings will need to be reported, you will need to make sure that you use the proper forms when filing your return. Here’s what you need to know about reporting your winnings to the IRS.
Winnings are Taxable
One of the first things to remember is that the federal government does tax all winnings. This is typically done at the same rate as all other income, including any salary or bank interest on savings accounts. However, the 1040 does not have a specific line item for reporting lottery winnings. Instead, you will be adding that information on the other income line on your return. You will be entering the full amount of your winnings with no specific reduction for gambling losses.
You will need to report all winnings earned during that year, depending on when you actually received the funds. For instance, if you won a lottery in December of a tax year, but did not cash the ticket until January of the following year, then you need to report the income in the year it was actually collected. The reason that it is done that way is because most taxpayers are on a cash basis when dealing with their tax payments.
Another point to remember is that you may be receiving your winnings in the form of installments. If that is the case, then you will need to make sure that you report only the installments received in that tax year, as that is the income that will need to be reported, not potential installments in the future. So the total prize amount does not need to be reported if it was not received in full in that tax year.
You also need to be aware that each state may tax this income differently. Therefore, you will want to work with your tax preparer to be sure that you have properly reported your winnings according to your state’s guidelines and paid the appropriate taxes necessary.
Deducting Your Losses
If you have gambled on a regular basis throughout the year, then you may have also incurred some losses. These losses can be reported as an itemized deduction that will reduce the amount of your taxable winnings throughout the year. As a result, you will be able to reduce the amount of your tax liability as well. Keep in mind that you will have to itemize to take advantage of this deduction. Therefore, if you do not have enough deductions to make itemizing effective, and the standard deduction will be the better option for your situation, then you will not be able to take advantage of your losses.
Still, it is important to keep track of these losses throughout the year and work with your tax preparer to determine if which option is better for your particular circumstances. This means keeping as accurate records as possible. Track not only your losses, but also your winnings. These records should include information about the dates that you gambled, the cost of any tickets or buy ins to particular card games, the cost of any wagers that you placed, and how much you have won or lost. You should also track the location of your gambling if you are at a casino or other gambling establishment. These places may report your winnings to the IRS before you file your taxes. So you will want to make sure that you have tracked these winnings, knowing that they may be reported and you may receive a 1098 form.
Another point is to hang on to any evidence that you might have of your losses. This includes any lottery tickets that were not winners. As a result, you will be able to back up any deduction you take on your losses to balance out your taxable winnings. However, you will not be able to take all your losses if they are more than your winnings. Working with your tax preparer, you can determine how best to minimize your tax liability for your lottery winnings.
Click on the link below to connect with a tax professional or accountant at Refund in Chicago, IL, who can assist in properly reporting your winnings and losses from your lottery gambling.
