Animal Kingdom was a long shot in the Kentucky Derby, and those who took a $2 gamble on the chestnut colt to win received a $43.80 payout.
That's a good profit, but also a taxable one. Gambling winnings, no matter how small, are subject to ordinary income taxes.
The Preakness Stakes at Pimlico, the second jewel of racing's Triple Crown, is less than two weeks away. For those feeling lucky and planning to bet, now is a good time to brush up on the tax implications. But it's not just about paying taxes. If some of your horses don't come in, you may be able to deduct losses on your tax return.
Taxes on gambling income are as complicated as a triple-part-wheel wager at the racetrack. (Don't ask.) The tax rules depend on the amount won and the type of gambling. Bingo and slots, for instance, have different rules from keno or horse racing.
For our purposes, let's stick to horse racing for the casual gambler.
Again, no matter how little you win, you're supposed to report that income on your tax return. The Internal Revenue Service relies on the honor system only so far. Once your winnings exceed a certain amount, the racetrack will give you — and the IRS — a Form W-2G that lists your winnings.
In the case of the ponies, you'll receive a W-2G if you win $600 or more and at least 300 times the amount of the wager. (For bingo and slots, parlors will issue a W-2G if you win at least $1,200. The limit is $1,500 for keno and more than $5,000 for a poker tournament.)
If you win enough, the racetrack will withhold state and federal taxes.
Tax withholding isn't a bad thing, says Melissa Labant, technical manager with the American Institute of CPAs. This way, you won't be hit by a huge bill come next tax season.
"Better they take it upfront than you being surprised April 15th," Labant says.
Racetracks will withhold federal and state taxes once you win more than $5,000 and 300 times the wager. The federal withholding rate is 25 percent. Maryland taxes are withheld at a rate of 8.5 percent for residents and 6.75 percent for outside bettors.
Don't try to outfox the IRS. You could end up having 28 percent of your winnings withheld for federal taxes if you fail to provide a correct Social Security or tax identification number to the racetrack.
Of course, we all can't be winners. But there is a tax break for amateur gamblers spurned by Lady Luck.
"If you aren't a professional gambler, and by far that's most of us who gamble casually on the Super Bowl or horse races, you can deduct as an itemized deduction the amount of losses you have," says Gil Charney, principal tax analyst with The Tax Institute at H&R Block.
But you can deduct losses only to the extent that you have winnings, Charney adds. So if you won $1,000 but lost $4,000, you could deduct only $1,000 in losses.
You must file an itemized return to take losses as a miscellaneous deduction. Some other miscellaneous deductions can be taken only if they exceed 2 percent of adjusted gross income. Gambling losses don't have that 2 percent hurdle, Charney says.
If you periodically gamble throughout the year, keep documentation on your wins and losses, dates and places, and even the people you were with in case the IRS ever questions the deduction, Labant says.