Taxes on Pennsylvania Prizes and Winnings

All prizes and winnings are considered income and must be reported, both to the IRS and to the Pennsylvania Department of Revenue, as taxable income. PA accountants and CPAs should review the IRS and PA requirements in order to help their clients properly report their income and avoid future audits or fines.

Types of winnings that must be reported include:

• Cash prizes – All winnings, regardless of size, must be reported. This includes lotteries, sweepstakes, game shows, reality TV shows, etc. 

• Noncash prizes – The fair market value of any noncash winnings must be reported as income, whether a $25 gift card to your favorite restaurant, tickets to a concert, a motorcycle or car, or a luxury cruise for two. Taxes and fees paid on behalf of the prize-winner are also considered income.

• Fantasy sports and pooled winnings – Whether with friends, co-workers, or an online group, winnings must be reported.

• Gambling and casino winnings – Cash prizes or winnings from gambling are more complicated because they may be offset by expenses or losses and may generate forms and withholdings from the payers.

What is not considered winnings or reported as income

• Gifts – It is possible the giver may need to pay a gift tax, depending on the amount and the recipient, but the recipient does not.

• Inheritance – Depending on the size of the inheritance and the relationship to the giver, inheritance taxes or estate taxes may be levied, but inheritances are not considered income.

• Door prizes – Door prizes or prizes that are given in a competition or contest are not taxable if no advantage or inequality in amount or value is offered or striven for by any of the participants.

Educate your clients on the importance of keeping track of their winnings and prizes. This is especially true if your client frequently engages in gambling, lotteries, sports pools, and other games of chance (even when there is some skill involved, such as in poker).

Your client will owe taxes in the year the prize or winnings are received, whether your client received a lump-sum payment or installments over several years.

Some winnings are straightforward. For instance, if your client wins a car in a sweepstakes, determine the fair market value of the car and report it as other income in the appropriate location in the federal and state forms.

If your client wins more than $5,000 in a lottery, 24% must be withheld for taxes. The payer will send a W-2G, reporting the winnings as well as the taxes withheld. State taxes may be withheld, as well. Levels for sending a W-2G form vary depending on the type of gambling that was engaged in, from $1,200 for bingo to $5,000 for poker tournaments.

But whether your client receives the form or not, he is still obligated to pay the taxes, adding the unreported winnings as other income to the applicable lines on the tax return.

If your client’s withholdings through his employment remain at approximately 90% of the expected taxes for the year, no quarterly reporting is necessary. However, if the cash or noncash prizes are likely to significantly increase your client’s taxes, it is wise to submit a quarterly estimated tax payment on the winnings, rather than waiting until tax day, to avoid penalties.

The IRS allows expenses and gambling losses to be deducted from winnings, but they may not exceed winnings. For example, if your client wagers a total of $100 and wins $500, your client’s winnings are $400. However, the total winnings ($500) and the total wagers ($100) must be reported separately.

If your client wagers $500 and only wins $100, though, you must report the $100 winnings as income but can only deduct $100 of the wager.

Pennsylvania does not allow a deduction for expenses, so your client’s winnings ($500 in our example) must be reported in full.

In order to deduct gambling expenses or losses, the IRS requires the taxpayer to keep scrupulous records, including:

• The date and type of each wager

• The name and location of the bet

• The amount won or lost

• Wagering tickets

• Canceled checks

• Credit card records

Gamblers who use a players club or members card at a casino can request a win/loss report, which will give a reliable list of activities there. This includes online casinos.

Casual gamblers may not include other expenses, such as travel and lodging, to offset winnings. However, professional gamblers, those who gamble for profit and self-support, may deduct them on Schedule C as business expenses.

Take the time to familiarize yourself with the intricacies of tax law surrounding winnings and prizes, and educate your clients. If you have specific questions, feel free to reach out to our wonderful PSTAP members through our member portal, just one of the many benefits of membership in PSTAP.