Uncle Sam demands a share of your gambling winnings. This includes everything from multimillion dollar lottery winnings to the value of the basket of booze raffled off in the church hall. If you itemize your deductions, you do get to deduct your gambling losses up to the amount that you report as gambling winnings.
If you score big at the track or hit the winning number in the state lottery, your winnings are taxable. If your winnings are high enough, they will be subject to withholding at a flat 25% in 2006.
Withholding is required if you win more than $5,000 from a state lottery, a sweepstakes or other lotteries. This includes church raffles. Withholding is also required if you win more than $5,000 from other wagering, such as dog and horse racing or jai alai, provided the winnings are at least 300 times the wager. Winnings from bingo or slot machines are exempt from withholding.
If you're in the 10% or 15% tax bracket, the 25% withholding will be more than you actually owe in taxes. You'll get back the excess when you file your return for the year. You should get a copy of Form W-2G showing the amount you won and how much was withheld. The IRS also gets a copy.
A flat 25% will also be withheld from bonuses you receive from your employer in 2006. (The withholding rate is 35% if you make more than $1 million a year.) Again, if you're only in the 10% or 15% bracket, this means the government withholds more than the tax that will actually be due.