Are sweepstakes casino winnings taxed?

Absolutely. The IRS treats sweepstakes winnings as “other income,” so they’re taxed just like your regular earnings. They’re subject to federal income tax, and you must report all winnings on your federal tax return, no matter the amount. You’ll do this on Form 1040, specifically on Schedule 1 under “Other Income.”

Here are some other forms you might receive: 

For prizes exceeding $5,000, federal tax withholding at a rate of 24% generally applies. This means the payer will withhold 24% of your winnings and send it directly to the IRS on your behalf. For prizes less than $5,000, taxes aren’t automatically withheld, but you’re still responsible for reporting and paying any taxes owed.

Even if you don’t receive a Form 1099-MISC or W-2G, you’re still required to report all your winnings. If you expect to owe more than $1,000 in taxes, you might need to make estimated tax payments throughout the year to avoid penalties when you file your return. You can calculate and pay estimated taxes using Form 1040-ES.

State taxes and differences

State taxes on sweepstakes winnings vary widely. In states like Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, there’s no state income tax. If you live in one of these states, great news! You won’t pay state income tax on your sweepstakes winnings.

There are, however, states with unique tax rules: 

• While California taxes most income, it doesn’t tax certain types of gambling winnings from out-of-state lotteries. However, sweepstakes winnings are considered taxable income.
• Pennsylvania taxes income from gambling and lotteries but exempts prizes won from small games of chance. Sweepstakes winnings, however, are taxable.
• New Hampshire and Tennessee tax interest and dividend income but don’t tax earned income, so sweepstakes winnings may not be subject to state income tax.

If you win a prize in a state different from where you live, you might need to file a non-resident state tax return and pay taxes in that state. Many states have reciprocity agreements to prevent double taxation.

Your home state might offer a tax credit for taxes paid to another state, but it’s crucial to check the specific laws to fully understand your obligations.

What is the tax rate on sweepstakes casino winnings?

When it comes to the tax rate on sweepstakes winnings, they typically fall under ordinary income. The federal tax rate on these winnings depends on your income bracket, ranging from 10% to 37%.

The amount withheld may also be affected by the prize’s value—if your winnings exceed $5,000, federal tax withholding at 24% will generally apply.

Several factors can influence the amount of tax you owe on your sweepstakes casino winnings:

• Total annual income. Your sweepstakes casino winnings are added to your other income, which might push you into a higher tax bracket.
• Filing status. Whether you file as single, married, head of household, etc., affects your tax brackets and rates.
• Deductions and credits. Itemizing deductions or claiming tax credits can reduce your taxable income, potentially lowering your tax rate.
• Alternative Minimum Tax (AMT). High-income earners might be subject to the AMT.
• State taxes. Don’t forget that state taxes may also apply, depending on where you live.

How to plan for tax obligations

To avoid any surprises come tax time, it’s wise to plan ahead:

1. Set aside money: A common recommendation is to reserve at least 30% of your winnings to cover federal and state taxes.
2. Estimated tax payments: If you expect to owe more than $1,000 in taxes, you might need to make estimated tax payments during the year to avoid penalties. You can calculate and pay estimated taxes using IRS Form 1040-ES. Estimated taxes are typically due quarterly.
3. Adjust your withholding: If you’re employed, consider adjusting the withholding on your regular income to account for the additional tax from your winnings. You can do this by submitting a new Form W-4 to your employer.

Reporting taxes on sweepstakes casino winnings

To stay on the right side of the IRS, it’s essential to report your sweepstakes winnings correctly. Here’s a step-by-step guide to help you navigate the reporting process:

Types of winnings and how they affect taxes

Sweepstakes prizes come in various forms—cash, gift cards, vacations, cars, or other valuable items—and each type affects your taxes differently.

Lump-sum vs. annuity payments

Some sweepstakes offer a choice between a lump-sum payment and an annuity paid over several years. Each option has different tax implications:

1. Lump-sum payment. You’ll receive the entire prize amount at once and report the full amount in the year received, which could significantly increase your taxable income for that year.
2. Annuity payments. You’ll receive smaller payments over several years and report each payment as income in the year received, potentially keeping you in a lower tax bracket.

Deducting expenses

The Tax Cuts and Jobs Act of 2017 suspended miscellaneous itemized deductions subject to the 2% adjusted gross income floor. This means that many expenses previously deductible are no longer deductible through at least 2025.

As a result, you cannot deduct expenses related to sweepstakes winnings, such as travel expenses to collect a prize and costs associated with sweepstakes casinos. 

In general, sweepstakes casino winnings don’t allow for deductions of expenses or losses unless you are considered a professional gambler. Let’s be honest: it’s pretty rare for sweepstakes participants.

The effect of sweepstakes casino winnings on your tax bracket

Adding sweepstakes casino winnings to your total annual income can potentially push you into a higher tax bracket. This means a portion of your income might be taxed at a higher rate, affecting your overall tax liability.

Here’s how it works:

• When you win a prize, the amount is added to your existing income, increasing your adjusted gross income (AGI) for the year.
• If this additional income pushes your total earnings beyond the threshold of your current tax bracket, you might move into a higher bracket. As a result, the income above the threshold is taxed at a higher rate.
• Only the portion of your income that exceeds the previous bracket’s limit is taxed at the higher rate, not your entire income.

Moving into a higher tax bracket can affect your eligibility for certain deductions and credits. Higher income levels might phase out your ability to claim child tax, education, and retirement contribution credits.

Tips on how to stay safe

Navigating sweepstakes taxes can be tricky, and it’s important to ensure you’re doing everything correctly while avoiding potential scams. Here are some tips:

• Consult professionals
• Verify the source of your winnings
• Keep accurate records
• Don’t pay upfront fees
• Be cautious with personal information
• Watch out for phishing attempts
• Stay informed about tax laws

Staying informed and following these guidelines will help you avoid pitfalls and correctly report your sweepstakes winnings. For further advice, check out our guide on how to avoid sweepstakes scams.

Sources:

• IRS Topic No. 419 (Gambling income and losses)
• State tax agencies
• IRS Form W-2G instructions
• IRS Form 1099-MISC instructions
• Publication 525 (Taxable and Nontaxable Income)
• Publication 529 (Miscellaneous Deductions).
• Tax Cuts and Jobs Act of 2017