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Don't forget to pay taxes on gambling winnings

Countless bars and civic groups in towns across Michigan (like local chapters of the American Legion and the Veterans of Foreign Wars, to name a few) offer weekly or monthly bingo games throughout the year. Many charitable organizations and churches also offer prize raffles, drawings and other contests as a way to raise funds.

In terms of gaming, Michigan also participates in the Powerball and Mega Millions nationwide lottery programs, has its own state lottery with various games and has several Native American-owned casinos, card rooms and gaming establishments. There are also two established horse racing tracks in the state, and pari-mutuel betting on sports like boxing, football, basketball and hockey.

Participating in a bingo game with friends, or heading to a casino for a few hours can be a fun way to pass the time or blow off some steam after a long week. It can also be lucrative if luck is on your side. You could possibly walk into a casino with a few dollars and leave with thousands.

Something that people might not realize, however, is that the State of Michigan and the federal government also claim their fair share of your charitable gaming and gambling profits.

Tax thresholds

The IRS requires that taxes be paid on winnings from gambling, games of chance (like bingo, slot machines, electronic poker games, etc.), the lottery and raffles once certain thresholds are met. Once gambling income is of a certain amount, it must be reported on a federal Form W2-G. Reporting on a Form W2-G also triggers the need to pay Michigan state-level taxes.

In certain instances, gaming winnings might also be subject to withholding. This means that the facility or gaming establishment must preemptively set aside a portion of the winnings and turn that money over to tax authorities instead of awarding it to the winner.

There are different tax thresholds for different types of gambling. It is important to note that the State of Michigan requires withholding whenever the federal government requires it (the thresholds are the same), but the tax rate is different. As of October 2012, the Michigan tax withholding rate on gambling winnings is 4.25 percent.

Taxes on raffle winnings

Tax liability - and the issuance of a Form W2-G - is triggered on raffle prizes once a threshold value of $600 is reached (in either cash or market value of merchandise/services) and the prize is at least 300 times the amount of the wager. Furthermore, withholding in the amount of 25 percent of the prize value must occur when a raffle prize is worth more than $5,000.

If a winner doesn't provide proper identification when collecting his or her prize of more than $600, then the 28 percent "backup withholding" rate applies instead of the standard 25 percent.

Taxes on bingo prizes and slot machines

The tax threshold amount for bingo prizes and slot machine winnings is different than that for raffles. The bingo and slot threshold is $1,200. This means that if you win a bingo prize or slot machine jackpot in the State of Michigan in an amount greater than $1,200, you will be responsible for paying taxes to both the IRS and the State.

Keno games

For keno games - whether on paper or electronic - the prize tax threshold is $1,500 after subtracting the cost of the wager.

Poker tournaments

When more than $5,000 (minus the cost of the wager or buy-in amount) is won in a poker tournament, then taxes must be paid.

As you can see, knowing whether or not you have to pay taxes on gambling winnings can be complicated. These situations are made even more difficult once you factor in informal bets like fantasy football or baseball leagues that might not be sponsored by particular organizations or gambling facilities. Regardless of how formal or informal the situation may be, though, if taxes are owed, the IRS will want their money. Paying the proper taxes due is the best way to avoid a potential audit in the future. To learn more, contact a tax professional in your area.

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