1. Casino Winnings Tax Rate
2. Casino Tax On Winnings
3. Irs Tax On Casino Winnings

I received gambling winnings in NY. Do I need to pay State tax in PA or NY on my winnings?' Your winnings are taxable both in your resident state and the state they are sourced to (in this case, New York); however, you will be able to claim a credit on your Pennsylvania return for any taxes paid to NY on your non-resident return.

When you owe back taxes, the Internal Revenue Service uses a number of methods to collect the money from you if you don't pay voluntarily. If you win the lottery, your prize is always taxable, and the state lotto agency that pays the prize may have an obligation to report your winnings to the IRS and withhold taxes from it. But even after the appropriate taxes are withheld, the remaining lottery winnings may still be vulnerable to IRS collections.

Tax Withholding on Lottery Prizes

State lottery agencies are required to withhold 25 percent of your winnings for federal income taxes if the total prize minus your wager is more than $5,000. This 25-percent withholding rate applies to all taxpayers, regardless of whether back taxes are owed or not. The amount withheld from your lottery winnings is treated as an estimated tax payment and doesn't usually reflect the amount of income tax you'll actually owe. As a result, you may overpay and be due a refund that's taken from you to pay your back taxes and other debts.

Special Backup Withholding

If you don't provide the lottery agency with your correct Social Security Number or other Taxpayer Identification Number, you may be subject to the 28-percent backup withholding rate on a portion of the winnings. This 28-percent rate applies to the first $5,000 of winnings if the total payment is $600 or more and is at least 300 times the amount of your wager. Your winnings in excess of $5,000 are still subject to the 25-percent withholding rate.

Your Form W-2G

Your lottery winnings are reported on Form W-2G by the state lottery agency for prizes of $600 or more that are at least 300 times the amount of your wager. For example, a W-2G is only required for a $3 lotto ticket if you win at least $900, though a $900 prize doesn't require withholding. The W-2G, which must be attached to your return, reports information such as the prize amount, the date you won it and the federal, and possibly state and local, income taxes withheld from your payment. If you itemize, you can reduce the amount of your taxable lottery winnings with a deduction for some or all the gambling losses you incur in the same year.

Refund Offsets and Collections

When you owe back taxes, the IRS will keep all refunds and apply them toward your unpaid tax balance. And once your federal taxes are paid off, refunds may continue to be withheld from you to pay state and local back taxes, child support and certain other outstanding debts you owe to government agencies. Before or after you win the lottery, the IRS can always place liens on your personal property and eventually enforce a levy – a seizure of your property – on as much property as it needs to pay off your taxes. Also at risk are your bank accounts, so if you deposit your lottery winnings in one of them, the IRS has the authority to take every dollar needed to satisfy your back tax debt.

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About the Author

Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.

You asked (1) whether legislation has been proposed recently to impose the state income tax on nonresidents' gambling winnings at Connecticut casinos; (2) if so, which legislators proposed the bills; and (3) whether other states with casinos impose their income taxes on nonresidents' gambling winnings.

SUMMARY

Under current law, nonresidents who have gambling winnings from Connecticut are subject to Connecticut income tax on those winnings only if they win the money in Connecticut's state-run lottery. Nonresidents' casino and pari-mutual winnings are not subject to the state income tax.

Bills to subject nonresidents' Connecticut casino winnings to the state income tax were proposed in 2005, 2007, and 2008. All three were sponsored by Rep. Shawn Johnston. All were referred to the Finance, Revenue and Bonding Committee, which did not act on them. In 2002, the General Assembly passed a law to impose Connecticut income tax on nonresidents' casino winnings over $5,000, but it repealed the provision a short time later before it could take effect. The 2002 laws were included in large emergency certified budget implementing bills.

A computer survey of 16 selected states with both state income taxes and casino or pari-mutuel gambling found that 15 impose state income taxes on nonresidents' winnings in those states. Of the states surveyed, only New York follows Connecticut's example in excluding nonresident casino and pari-mutuel winnings from its state income tax.

CONNECTICUT INCOME TAX TREATMENT OF NONRESIDENTS' GAMBLING WINNINGS

People who are not Connecticut residents do not have to pay Connecticut income taxes on non-lottery gambling winnings in the state. By law, nonresidents owe Connecticut income tax only on Connecticut state lottery winnings exceeding $5,000. Winnings from all other types of gambling in the state are tax-exempt for nonresidents, including winnings from casino games, slot machines, pari-mutuel wagering, raffles, or other types of gambling occurring in Connecticut (CGS § 12-711 (b)). By law, such winnings are not considered to be derived from Connecticut sources for purposes of imposing the state income tax on those who do not live here (Department of Revenue Services, Informational Publication, IP 2005 (15), issued 10/20/05).

RECENT LEGISLATION ON NONRESIDENTS' CASINO WINNINGS

The distinction between nonresidents' Connecticut income tax liability for Connecticut lottery winnings and other types of gambling income has existed since 2001. PA 01-6, June Special Session, imposed the Connecticut income tax on a nonresident's winnings of more than $5,000 in a lottery run by the Connecticut Lottery Corporation. The change took effect on July 1, 2001 and applied to tax years beginning on or after January 1, 2001. Until that time, nonresidents were not subject to Connecticut's income tax on any Connecticut gambling winnings. The 2001 change was passed as part of a large emergency certified bill that included many tax changes.

In the May 9 Special Session in 2002, the General Assembly at first extended the income tax to also cover nonresidents' winnings over $5,000 from all other gambling activities that take place within Connecticut's borders, including at casinos on Indian reservations within the state (PA 02-1, May 9 Special Session, § 81). It changed its mind a short time later and passed another act to repeal the extension (PA 02-4, May 9 Special Session, § 17). Both sections were included in emergency certified bills implementing the state budget.

Since 2002, three proposed bills have been introduced to extend the income tax to the casino winnings of nonresidents. All were introduced by Representative Shawn Johnston of the 51^st district. The bills were:

● HB 5949 (2005 Session) - An Act Concerning Taxation Of Out-Of-State Residents' Casino Winnings (co-sponsor: Rep. Nafis, 27^th district)

● HB 6238 (2007 Session) - An Act Concerning Taxation Of Out-Of-State Residents' Casino Winnings

● HB 5408 (2008 Session) - An Act Concerning Taxation Of Out-Of-State Residents' Casino Winnings

All three bills were referred to the Finance, Revenue and Bonding Committee, which took no action on them.

Casino Winnings Tax Rate

OTHER STATES

A computer survey of income tax provisions of 16 selected states shows that 15 impose state income tax on nonresidents' non-lottery gambling winnings from within their states (see Table 1). According to the American Gaming Association's (AGA) 2008 Survey of Casino Entertainment, 13 of these states have casino gambling at commercial or racetrack casinos, Indian tribal casinos, or in the form of video lottery terminals. The other three states have noncasino forms of pari-mutuel wagering, such as horseracing. The only state in our survey that does not tax nonresidents' winnings from these forms of gambling is New York. The remaining states tax winnings, although some require winnings to exceed a certain threshold or allow nonresidents to offset winnings with losses.

Casino Tax On Winnings

The state with the highest number of casinos according to the AGA survey is Nevada, which is not included because it has no state income tax.

Table 1: State Income Tax on Nonresidents' Non-Lottery Gambling Winnings

* Source: American Gaming Association

+ Source: State tax department websites

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Irs Tax On Casino Winnings