Intro to U.S. Tax Implications of Nonresident Gamblers
There’s so much content I’ve wanted to write about since I started this blog. Perhaps unfairly, I have neglected U.S. Nonresidents to this point. Your time for attention has come.
Suppose you are a citizen of Italy and will be participating in the 42nd annual World Series of Poker Main Event at the Rio All-Suite Hotel & Casino in Las Vegas, Nevada. This year’s Main Event commences on July 7. Should you be lucky enough to win prize money, you are most definitely subject to the rules of the Internal Revenue Code.
In general, nonresident aliens are subject to U.S. tax on U.S. source income. In order to ensure payment to Uncle Sam, the Code mandates the tax must be withheld from the payment of the income by a withholding agent. Gambling winnings of nonresident aliens are subject to a 30-percent withholding rate. So, like an employer withholds a portion of wage income, the payer of tournament winnings to a nonresident must withhold a portion of tournament winnings.
BUT: The U.S. has negotiated tax treaties with other countries. Tax treaties serve two primary purposes: (1) avoid double taxation on the same income, and (2) prevent taxpayers from evading taxes. There’s a lot more to tax treaties than you’ll probably ever want to know. For U.S. gambling winnings of nonresidents, many tax treaties reduce the withholding rate or eliminate it altogether. At the bottom of this post is a list of the countries the U.S. has tax treaties with exempting withholding tax on U.S. gambling winnings of their residents.
For the citizen of the Italy, the U.S.-Italy tax treaty exempts gambling winnings of Italian residents from U.S. income tax. Of course, Italy will impose tax on the winnings.
U.S. professional gamblers may think, why don’t I change citizenship or just move to a country that won’t require U.S. withholding? There are a couple of tax issues to consider:
Many U.S. citizens relinquishing their citizenship are subject to the expatriation tax. For 2011, the tax generally bites on unrealized gain of the covered expatriate’s property to the extent it exceeds $636,000. A simple example of an unrealized gain is real property (e.g. land) that has appreciated in value from the original purchase price but has not yet been disposed. The expatriate subject to the rule must, among other things, file a Form 8854.
For additional information, check out this IRS publication. (Note: This publication is for the 2009 tax year; the 2010 tax year version has not yet been released).
U.S. Taxation of Worldwide Income
Let’s say you would have many unrealized gains subject to the expatriation tax and instead of changing citizenship, you desire to simply move abroad.
Generally, U.S. citizens are taxed on their worldwide income. In general, it doesn’t matter where a U.S. citizen actually lives for U.S. tax purposes. Thus, if you move to the United Kingdom and come to the U.S. once a year to play in the World Series of Poker, for example, your winnings therefrom, if any, are still taxable in the U.S.
But I say “in general” for a reason. There is the Foreign Income Earned Exclusion. Essentially, it says a U.S. citizen may treat up to $91,500 of income (from 2010) as not taxable by the U.S. To qualify, you must (1) have a “tax home” in a foreign country and (2) earn income from personal services performed in a foreign country. For further details, check out this IRS publication.
Finally, as promised:
U.S. Tax Treaties with the Following Countries Exempt U.S. Withholding from Gambling Winnings of its Residents:
- Czech Republic
- Russian Federation
- Slovak Republic
- South Africa
- United Kingdom