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Tweetbag: Withholding Gambling Winnings of U.S. Nonresidents

September 17th, 2012 Leave a comment Go to comments

Today I received the following inquiry:

“[L]ooking for some info why 30% was tak[en] out of an $83 winning in poker at a NY state casino when most states tax after 5k.”

The casino in this case was the Seneca Niagara Casino, located in Niagara Falls, NY.

To evaluate the issue, we need to know whether the taxpayer is a U.S. resident. That’s because the rules for withholding and informational reporting of gambling winnings under the Internal Revenue Code depend on the residency status of the taxpayer.

It turns out this taxpayer is a resident of Canada. In general, gambling winnings paid to foreign individuals are subject to 30% withholding, assuming the income is not effectively connected with a U.S. trade or business. Proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel, however, are not amounts subject to reporting.

Here, it seems that Seneca properly withheld thirty percent of the $83 winnings, as poker is not exempt from nonresident withholding.

Note that an applicable tax treaty between the United States and a treaty partner may reduce the amount withheld by Seneca Niagara. The United States-Canada Tax Treaty, however, offers no such relief.

Is there any other relief? Suppose the same taxpayer enters in only one other poker tournament during the year paying an $83 entry fee, and loses. Now the taxpayer has net $0 of gambling winnings for the year, yet approximately $25 was withheld on the $83 win. One shouldn’t pay $25 in U.S. tax on net zero gambling winnings. To possibly obtain a refund, the taxpayer could file a Form 1040NR to claim the winnings and losses for the year and the amount withheld.

Keep in mind that the withholding and informational rules discussed above are pursuant to federal law, not state law. Again, U.S. casinos are required to withhold 30% and issue a Form 1042-S to nonresidents unless an exception applies.

Of course, some states have their own separate informational and withholding rules for state income tax purposes. But they are not in lieu of federal law, which still must be followed, but are in addition.

The comment that “most states tax after 5k” is likely a reference to the federal rule that requires all U.S. casinos to issue a Form W-2G to U.S. residents who win more than $5,000 in a poker tournament, net of the entry fee. Note, however, whether a W-2G is actually issued has no bearing on whether the actual winnings are taxable, as all gambling winnings of U.S. residents are taxable, regardless of the amount.

  1. Rose
    September 17th, 2012 at 19:20 | #1

    ty for posting this . I just find it difficult that if I win at slots I am not subjected to taxes till after 1200. In Nevada also not taxed until after 5000k. So being such a small amount it seems crazy.

  2. taxdood
    September 17th, 2012 at 19:25 | #2

    @Rose

    Rose, in general nonresidents are subject to U.S. income tax on gambling winnings of any amount, unless they fall under an exception. In any event, the $1,200 slot amount does not apply to nonresidents, but to residents. Furthermore, the $1,200 threshold pertains to whether a Form W-2G is filed with the IRS, not whether the winnings are subject to tax. In the U.S., even $1 of slot winnings are subject to income tax.

  3. Rose
    September 17th, 2012 at 19:32 | #3

    ty Brad , How do we change it lol I don’t mind paying taxes but find it interesting the process I have to go through to get it back. I have the forums. Wish they was a treaty between our 2 countries

  4. Russ
    December 13th, 2012 at 10:32 | #4

    I would like to interject about the deductibility of a nonresident aliens gambling losses.

    On a resident taxpayers return, gambling losses are treated as an itemized deduction. Gambling winnings are included in gross income, and the losses are included in computing taxable income. Unfortunately, most itemized deductions are disallowed for nonresident aliens in computing the tax on FDAP income (which includes gambling winnings). (http://www.law.cornell.edu/uscode/text/26/873). Consequently, visitors may not use many of their losses, and may have tax bills even if they they lost money overall.

    But not all hope is lost — Although nonresidents may not offset “gains” and “losses”, there is some level of dispute about what constitutes the “gains” that are included in gross income. There is considerable support for the proposition that the number should include all gains and losses incurred during a given “gambling session.” What constitutes a “session” is uncertain as a matter of law, but one certainly does not have to add up the gains from winning hands of poker (ignoring all the losing hands) and pay tax on that amount. Possible methods could include netting gains and losses during each sitting, each day, or during the period before you cash in any chips.

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