Arizona Gambling & Taxes

As legal sportsbooks are poised to become part of Arizona’s gambling scene, it’s increasingly crucial for residents and visitors in the state to comprehend how gambling influences their income tax situation.

In simpler terms, if you win big while gambling in Arizona, whether through the Arizona Lottery or at casinos, part of your winnings will be held back for tax purposes. This is a regulation set by the Arizona Department of Revenue and the IRS, as they regard your gambling winnings as taxable income.

Accountants and other financial professionals can provide you with specific solutions for your particular circumstances in regards to gambling and taxes in Arizona. However, there are also some broad guidelines to consider.

This covers situations where your winnings are taxable, the method of reporting your winnings, the amount to be paid, and potential deductions. Please note, this information is only applicable in Arizona, for the 2020 tax year, and for filings in 2021.

How much gambling winnings are taxed

In the United States, it is common for casinos, lotteries, and sportsbooks to retain 25% of your winnings.

Typically, they will proceed with this if they possess your tax details like your Social Security number. If they lack such information, they may retain up to 28%.

Although this could reduce your liability, it might not be enough. It depends on the rate you pay to the IRS, factoring in all your income for the tax year.

Don't forget about the IRS withholding rate

From the tax year 2017 onwards, the IRS applies a 24% withholding rate to gambling winnings that total $5,000 or more during a tax year.

Please note that this is a year-long cumulative total. Eligible winnings may comprise of, but are not restricted to:

• Certain parimutuel pools
• Jai Alai
• Lotteries
• Sweepstakes
• Wagering pools

What to know about the Federal Form W-2G

How can you declare your gambling earnings and withheld amounts to the IRS? In this situation, Form W-2G, Certain Gambling Winnings, is an essential resource. This form provides both you and the IRS with detailed information about your annual income and withholdings from each gambling company.

Should you have won from gambling at multiple places throughout the year, you ought to receive a distinct W-2G form from each venue. Although it is your obligation to ensure the gambling companies possess the accurate and essential details, the responsibility of completing and delivering this form lies with them.

If your cumulative winnings for the year fall within certain parameters, gambling companies will issue you a W-2G.

• The earnings from a bingo game or slot machine amount to $1,200 or more, without deducting the bet.
• The earnings from a keno game, after deducting the wager, are $1,500 or more.
• The earnings from a poker tournament, after subtracting the wager or buy-in, exceed $5,000.
• The winnings, excluding those from bingo, slot machines, keno, and poker tournaments, are $600 or more after deducting the wager, and they are at least 300 times the wager amount.
• The winnings will be subject to withholding for federal income tax, either through regular gambling withholding or backup withholding.

Once you’ve obtained all the necessary Form W-2Gs, you possess all the required information to report your annual gambling income and withholding to the IRS.

How to report gambling winnings in Arizona

The state lottery and tribal casinos withhold a portion of your winnings as per gaming agreements and the law, potentially covering your tax obligations. Hence, there’s no advantage to under-reporting your income. Doing so could risk an audit, which might result in penalties such as fines and interest.

It’s quite simple to report your annual gambling activity to the IRS.

When you declare your activity, it’s essential to keep in mind that your earnings and withholdings are the areas of interest for the IRS. Your profitability from gambling throughout the year is utterly inconsequential.

Some taxpayers mistakenly believe that they don’t need to report their winnings if they didn’t make a profit. Consider your gambling winnings as similar to your gross wages from your job. It is necessary to report these amounts, not only the profit if there is any.

To accomplish this, compile all of your W-2Gs if you’ve received more than one throughout the year. The numbers in Box 1 and Box 4 on each form are the ones you need. Box 1 contains your annual winnings. If you have multiple W-2Gs, add up all of the Box 1 numbers. Afterward, record this total on your IRS Form 1040, Schedule 1 under “Other Income.” Then, include it with any other non-W2 income sources you may have had during the year that are eligible to be reported as “Other Income” on Line 8 of your Form 1040. You have now declared your annual winnings.

Details of any withheld amounts can be found in Box 4. If you have multiple W-2Gs, sum up all the figures. This total is then added to your annual withholding, which is entered on Line 17, labelled Federal Income Tax Withheld, on your Schedule 1. Don’t forget to attach this Schedule 1 to your 1040 form before filing. However, do not attach your W-2Gs; instead, keep these for your personal records. By doing this, you’re effectively reporting all your yearly gambling activities to the IRS.

Arizona state taxes for gambling

Arizona law does not mandate that casinos and/or the lottery withhold extra taxes from your winnings for the state. Consequently, you might end up owing the state more than what was initially withheld. The state of Arizona operates on a marginal income tax system with four brackets, using your federal adjusted gross income as the calculation base. Furthermore, the procedures for state residents and non-residents are not the same.

If you’re not an Arizona resident and you win money in a lottery or at a tribal casino within the state, your W-2G might not reflect any withholding. This is due to Arizona’s non-resident filing requirement of $15,000. Therefore, if your winnings for the year didn’t reach this threshold, there might not be a need for you to file a non-resident return.

However, it’s crucial to remember that the $15,000 threshold applies to all forms of income you earn in Arizona. For instance, even if your gambling winnings didn’t meet this minimum, you’d still need to file a non-resident return if you sold property in the state during the year and earned at least that amount.

Tax schedules for the tax year 2020

Both residents and non-residents are subjected to the same income tax rates. However, in the tax year 2020, while the rates remain the same, the income levels that trigger these rates vary depending on your filing status. Here is the tax schedule if you’re filing as single or married but filing separately:

• $0 to $26,499: 2.59%
• $26,500 to $52,999: 3.34%
• $53,000 to $158,999: 4.17%
• $159,000 and over: 4.5%

This is your tax schedule for the tax year 2020 if you are married and filing jointly, filing as head of household, or are a widow/widower under certain circumstances:

• $0 to $52,999: 2.59%
• $53,000 to $105,999: 3.34%
• $106,000 to $317,999: 4.17%
• $318,000 and over: 4.5%

Understanding how marginal tax schedules function is crucial. To illustrate, consider a married couple that filed a joint income of $150,000 in 2020. The couple would be liable to pay 2.59% tax on the initial $52,999 of their income, then 3.34% on the income in the range of $53,000 to $105,999, and finally 4.17% on the remaining portion of their annual income. Therefore, without deductions, their tax obligation would be:

• $1,373 is 2.59% of an income up to $52,999.
• Income from $53,000 to $105,999 contributes to 3.34% of income: $1,771.
• $1,835 is 4.17% of the remaining $44,001.
• Total: $4,979 ($1,373 + $1,771 + $1,835)

How to report AZ gambling income to state

As a full-time resident of Arizona, you should consider several different forms. Please be aware that some Indigenous peoples residing in the state may not need to file an Arizona tax return. This exemption applies if all the specified conditions are met in a tax year.

• You are a registered member of a tribe recognized by the federal government.
• For the entire year, you resided on sovereign lands.
• All of your income for the year was earned on a federal reservation.

If Arizona residents have a taxable income of $50,000 or more for the year, or wish to itemize deductions, they are required to use Form 140. On the other hand, if their taxable income is less than $50,000 for the year or they prefer to opt for the standard deduction, they have the option to use either Form 140A or 140EZ. Form 140NR is for use by non-residents.

Reporting your gambling income to the state is straightforward if you have an IRS 1040. The Arizona Department of Revenue calculates your taxable income by starting with your federal adjusted gross income, which already includes your gambling winnings. All you need to do is copy the federal adjusted gross income (found on Line 11 of your IRS Form 1040) onto Line 12 of your AZ Form 140 or 140A. This action completes the reporting of your winnings to the state.

When reporting withheld amounts, you need to pay extra attention to your W-2G forms. Look at Box 13, which is labeled State/Payer's state identification no. If it mentions any jurisdiction other than AZ or Arizona, exclude that form from your withholding reporting. However, if you have any W-2G forms indicating AZ/Arizona, you need to report the amount(s) in Box 14 as part of your AZ withholdings. If you have multiple forms indicating AZ/Arizona, sum up all the amounts from the relevant Box 14s.

You would proceed by adding the sum to your total Arizona withholding for the year, to be documented on Line 24 of your Form 140 or 140A. It is important to note that unlike your federal return, you are required to attach your W-2G(s) if you are claiming tax withheld from them. But, ensure you make copies for your records before doing so.

For the 140NR form, input the total from Box 1 of your AZ-only W-2G forms on Line 22, titled ‘Other Income Reported on Your Federal Return’. If there are any amounts in Box 14 of the same W-2Gs, add these to your remaining AZ income tax withheld and record the total on Line 62. By doing this, you have completed your duties.

I didn't receive Form W-2G. What do I do?

Should you believe you’re entitled to a W-2G and you have not yet received it with the tax deadline approaching, the initial course of action is to get in touch with the gambling company you suspect owes you the form.

An error such as an incorrect address might have prevented the form from getting to you. Regardless, not getting a W-2G doesn’t absolve you of the duty to correctly report your income.

To do this, your optimal choices would be bank statements and receipts from your gambling activities throughout the year. Statements from player loyalty/rewards programs can also be extremely beneficial in this case.

If I win a prize with a group, do I have to pay taxes?

Yes, you will need an IRS Form 5754 if you either participate in an Arizona Lottery pool or join a poker game where you and your friends pool your money.

Assign a person from the group to complete the form, duplicate it for all members, and then forward it to the prize issuer. The data provided will enable the prize issuer to accurately distribute a W-2G form to each group member.

From that point forward, it becomes standard procedure for everyone in the group.

Can I get tax deductions related to gambling?

This might be true at the federal level, but not in the state of Arizona.

Gambling losses can be deducted from your federal taxable income, but there are a few important details to remember. Firstly, you must choose to itemize your deductions. Therefore, this is only a beneficial course of action if your itemized deductions for the year exceed the federal standard deduction. Additionally, it’s vital to understand that your deductions can only match the amount of your winnings, even if you experienced a net loss over the year.

In conclusion, you are not allowed to deduct any associated expenses such as your hotel or food costs incurred during your gambling activities. On Line 28 of Schedule A in Form 1040, you should list your gambling losses. If you opt for this, it is important to maintain comprehensive records of your gambling activities. This is where loyalty programs can be particularly beneficial. It is also essential to keep bank statements and receipts.

When claiming gambling winnings, be prepared

Resources for taxpayers with questions are available from both the Arizona Department of Revenue and the IRS.

The process of seeking assistance from both agencies will be significantly smoother if taxpayers are well prepared, according to their emphasis. Therefore, it is crucial that you have all your W-2G forms, personal information, and evidence of your gambling losses readily available.

The Arizona Department of Revenue provides taxpayer help at two of its state offices. The IRS also maintains Taxpayer Assistance Center Offices nationwide.

Are there taxes on multi-state lottery games?

The Arizona Department of Revenue treats prizes won from multi-state lottery games such as Mega Millions or Powerball the same as those won from AZ-only lottery games.

The process of reporting your winnings from them is the same, and this also applies to the IRS.

What if I win big with the Arizona Lottery?

In the view of the state and the IRS, the lottery is simply another form of gambling.

If you win a lottery prize of $600 or more, you are supposed to receive a Form W-2G. Moreover, for tax reasons, the Arizona Lottery is expected to retain a portion of your winnings.

It’s often a good idea to seek advice from financial and legal experts before collecting your prize in many instances. These professionals might be capable of creating strategies to minimize your tax payment.

If I didn't win a cash prize, what happens then?

Winning a boat, car, or trip from a casino or in a sweepstakes is considered taxable income by both the Arizona Department of Revenue and the IRS.

The prize grantor should provide you with a Form 1099, which indicates the fair market value of your prize. This form should be included in your other 1099 income on Line 21 of your IRS Form 1040. This amount will contribute to the federal gross income you utilize on your state tax returns.