Maryland Gambling & Taxes
During the tax year 2020, many Maryland residents won some money playing the Maryland Lottery, on a video lottery terminal, or at a casino or racetrack.
In many of those cases, gambling companies withheld part of those winnings for tax purposes. That’s because the IRS, Comptroller of Maryland, and local governments in the Old Line State consider gambling winnings taxable income. The onus is on gamblers to make sure they report their winnings correctly, even in the case of non-cash prizes, and pay the correct amounts to the appropriate jurisdictions.
As with many other areas of life when it comes to taxes, it’s natural to have questions. The answers to many of them — like how to report, how much to pay, and what deductions might be available — are below. All the information is specific to gambling taxes in Maryland and correct for filing in 2021 for the 2020 tax year.
How much are my gambling winnings taxed?
Usually, prize grantors withhold 25% of your winnings above certain thresholds.
That’s typical if they have the appropriate information like your Social Security number. If they lack such information, they might hold up to 28%. That might take care of your tax liability on the winnings, but it isn’t a guarantee.
It depends on how much income you have from other sources for the year. The graduated tax schedules could require you to pay a higher rate on the top levels of your 2020 income.
The new regular withholding rate
Starting with the tax year 2017, the IRS has a withholding rate of 24% applicable to gambling income of at least $5,000 during a tax year.
It’s important to remember that’s a cumulative total from the entire year. This applies to winnings from:
- Certain parimutuel pools
- Jai Alai
- Wagering pools
Federal Form W-2G, Certain Gambling Winnings
For gamblers during tax time, Form W-2G, Certain Gambling Winnings is a must-have. This form tells both you and the IRS how much you won gambling with a specific entity during a tax year along with how much that company withheld from your winnings for tax purposes.
The best part of this is that the prize grantor, not the recipient, is responsible for completing this. You should get one from each entity you received gambling winnings from during the year, provided your cumulative winnings from the year meet the following thresholds:
- The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot machine
- The winnings (reduced by the wager) are $1,500 or more from a keno game
- The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker tournament
- The winnings (except winnings from bingo, slot machines, keno, and poker tournaments), reduced by the wager, are $600 or more, and at least 300 times the amount of the wager
- The winnings are subject to federal income tax withholding (either regular gambling withholding or backup withholding)
For example, if you played slots at a Maryland casino several times during the year and got enough line-hits to profit at least $600 in those visits, you should get a W-2G from that casino. Once you have all the W-2Gs you need to chronicle all your gambling winnings for the year, it’s time to report them.
How to report MD gambling winnings on taxes
The first thing to remember is that you won’t come out ahead by skipping on reporting your winnings. In most cases, the amount withheld already took care of your liability.
Therefore, you’d just unnecessarily be risking an audit if you chose to underreport your income. You’d also put yourself at risk of fines and interest if the withholding wasn’t sufficient. Reporting your gambling winnings to the IRS is actually not that difficult.
Another important note is that winnings are not the same as profit. Think of it as your paycheck from your employer. You have your gross wages and then your net payment after deductions for benefits and taxes. Your winnings are all your qualifying payouts from gambling for the year, regardless of whether you actually made a profit gambling for the year, just like your gross wages before deductions. You cannot simply subtract your losses from your payouts for the year and only report the difference if there is any.
Once you have all the pertinent Form W-2Gs, add up all the figures in Box 1 of the forms. That total goes as “Other Income” on your IRS Form 1040, Schedule 1. Then, add it to other sources of income you may have from the year that qualify as Other Income on Line 7a of your Form 1040. You’ll also notice figures in Box 4 of your W-2Gs. Those amounts represent the parts of your winnings that entities withheld. Again, total them if you have more than one W-2G.
That goes in with all the rest of your withholding for the year on Line 17, Federal Income Tax Withheld, of your Schedule 1. Attach the Schedule 1 to your 1040 before you send it to the IRS. Do not attach any of your W-2Gs. Keep them for your records. You are now done reporting your gambling income for the year to the IRS.
Maryland state taxes for gambling
Maryland law requires gambling companies to withhold 9.25% of gambling winnings over $5,000 for residents and 7.5% of winnings over that threshold for non-residents.
However, you still have to pay state income tax on all gambling winnings over $500. State law requires you to do so using Form 502D, Declaration of Estimated Tax. You must do so within 60 days of receiving your winnings to avoid delinquency. The form includes instructions on how much to pay at that time.
For gambling payouts of less than $500, there’s no 60-day payment requirement. You can wait to pay the tax on those until you file if you wish. However, you should keep detailed records and put back part of the winnings so you are prepared for tax time if that is your course of action. How much you pay on those winnings depends on the amount of ordinary income you have for the entire year from all pertinent sources.
The state has three levels of graduated income tax which are identical regardless of your filing status. Those are:
- $0 to $1,000: 2%
- $1,001 to $2,000: $20 plus 3% of the excess over $1,000
- $2,001 to $3,000: $50 plus 4% of the excess over $2,000
Maryland then has five more levels that vary depending on how you file. If you file as single, married filing separately, a fiduciary, or someone else can claim you as a dependent, this is the rest of the tax schedule:
- $3,001 to $100,000: $90 plus 4.75% of the excess over $3,000
- $100,001 to $125,000: $4,697.50 plus 5% of the excess over $100,000
- $125,001 to $150,000: $5,947.50 plus 5.25% of the excess over $125,000
- $150,001 to $250,000: $7,260 plus 5.5% of the excess over $150,000
- $250,001 and over: $12,760 plus 5.75% of the excess over $250,000
If you are married and file jointly, file as head of household, or are a widow/widower in certain circumstances, this is your tax schedule:
- $3,001 to $150,000: $90 plus 4.75% of the excess over $3,000
- $150,001 to $175,000: $7,072.50 plus 5% of the excess over $150,000
- $175,001 to $225,000: $8,322.50 plus 5.25% of the excess over $175,000
- $225,001 to $300,000: $10,947.50 plus 5.5% of the excess over $225,000
- $300,001 and over: $15,072,50 plus 5.75% of the excess over $300,000
Reporting instructions for Maryland residents
Maryland residents should use Form 502 to report their gambling income and any amounts withheld or already paid during the year. If you are a resident and have your IRS Form 1040 and all your W-2G forms, this is quite easy. Just transfer your adjusted gross income, which will already include your gambling winnings for the year, from your 1040 to Line 1 of your 502. Then, add up all the totals in Box 4 of your W-2Gs that show MD or Maryland in Box 13.
Include that total with all your other Maryland tax withheld for the year on Line 40 of your 502. There are two important things to note here. If Box 13 on any of your W-2Gs denotes any state other than MD, do not include the sums in Box 4 from those forms in this total. Additionally, you must attach copies of all the W-2Gs you include in this total to your 502. At this point, you’re done with your reporting obligations to the state.
Finally, 23 Maryland counties and the city of Baltimore levy local income taxes in addition to what you owe the state. For example, Baltimore residents pay another 3.2% on their income for the tax year 2020. The rates are relevant for where you live, not where you earn your income. You report your local income tax information on your 502. Contact your local municipality or the Comptroller of Maryland for information on your local rate.
Reporting instructions for non-residents
If you live in another state but won qualifying prizes while gambling in Maryland and thus had amounts withheld from those winnings, you may believe your are due a refund on those amounts. If so, file a none-resident return.
Non-residents should use Form 505 instead of Form 502. Again, only W-2G forms that show MD or Maryland in Box 13 are relevant here. Add up all the numbers in Box 4 of those forms, if you have more than one. Then, include that total in your MD Taxes Paid on Line 43 of your 505. You must attach copies of all the W-2Gs you use to your 505 when you submit it.
What if I don’t receive a Form W-2G?
If you didn’t get a Form W-2G, that doesn’t mean you don’t have to report your winnings or pay any amount you may still owe. You are still responsible for doing both.
The first thing to do is to contact the entity you believe owes you a W-2G. The company may have your address wrong or made some other error it can correct to get you the form.
Again, underreporting your income can only lead to undesirable consequences.
Do I have to pay taxes if I’m part of a group of people who wins a prize?
If you are part of a Maryland Lottery pool or put your money together with some friends to make a winning bet on a horse race, you should familiarize yourself with Form 5754.
Delegate one member of your group to fill out the form and submit it to the prize grantor. Using that information, that entity will get an appropriate Form W-2G to each individual in the group.
From there, each person can take care of their own tax responsibilities. Do not send a Form 5754 in with your federal or state returns. Do, however, make copies for everyone in the group.
Are there any tax deductions related to gambling?
On the federal level, possibly. For Maryland, no. If you want to deduct your gambling losses on your IRS return, you must opt to itemize all your deductions for the year. Taking the standard deduction, you forfeit this choice. Use Line 28 on Schedule A, Form 1040 to record your gambling losses.
Please note the proper procedures to avoid an audit. First, you can only deduct your losses up to the point of your winnings for the year. You can’t deduct an amount greater than the winnings you collected from gambling for the year, even if you actually had a net loss.
Additionally, you can’t deduct gambling-related expenses. If you stayed at a casino hotel, got a meal while you were playing, etc., those are not gambling losses. If you do opt to do this, keep detailed records like bank statements, receipts, and tickets.
Loyalty and rewards programs that gambling companies provide can be very helpful here, as statements from them will show a detailed record of all your activity. As their registrations are typically free, it’s a good idea to participate.
How to claim gambling winnings and/or losses
Both the IRS and the Comptroller of Maryland have resources for taxpayers with questions.
When you access these resources, however, you should be prepared. That will make the process easier for everyone.
Have your Form W-2Gs, your personal information and proof of any gambling losses you want to deduct on hand. For help with your state return, you can sign up for a free virtual appointment. On the federal level, you can find an IRS Taxpayer Assistance Center Office.
Taxes on multi-state lotteries
As the Maryland Lottery participates in games such as like Cash4Life, Mega Millions, and Powerball, prizes won playing them are local income.
You will be responsible for paying the same taxes you would winning prizes playing Maryland-only lottery games. Federal and state laws consider it all the same.
What happens if I win a few thousand dollars on a winning MD Lottery ticket?
As far as the IRS and state are concerned, playing the lottery is like any other form of gambling.
The lottery will send you a Form W-2G if you win a prize of $600 or more and withhold part of your winnings in accordance with federal and state law.
If you win a prize of six or seven figures, it’s important to consult with financial and legal professionals before claiming your prize. They may be able to come up with strategies to minimize your tax liability.
What if all or part of my gambling winnings aren’t cash?
Non-cash prizes won in games or sweepstakes are taxable income in the eyes of the IRS and the state.
The entity that grants the prize should give you a Form 1099 with your tax information on it and the fair market value of the item(s). That amount goes on Line 21 of your IRS Form 1040, along with the totals from any other 1099s you received for the same tax year.