Gambling Winnings

Income tax is withheld from certain kinds of gambling winnings. For 2002, the amount withheld is 27% of the proceeds paid (the amount of your winnings minus the amount of your bet).

Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding.

• Any sweepstakes, wagering pool, or lottery.
• Any other wager if the proceeds are at least 300 times the amount of the bet.

It does not matter whether your winnings are paid in cash, in property, or as an annuity. Winnings not paid in cash are taken into account at their fair market value.

Gambling winnings from bingo, keno, and slot machines are generally not subject to income tax withholding. However, you may need to provide the payer with a social security number to avoid withholding. See Backup withholding on gambling winnings, later. If you receive gambling winnings not subject to withholding, you may need to make estimated tax payments. (See chapter 2.)

If you do not pay enough tax through withholding or estimated tax payments, you may be subject to a penalty. (See chapter 4.)

Form W-2G.   If a payer withholds income tax from your gambling winnings, you should receive a Form W-2G, Certain Gambling Winnings, showing the amount you won and the amount withheld.

Report the tax withheld on line 59 of Form 1040.

Information to give payer.   If the payer asks, you must give the payer all the following information.

• Your name, address, and social security number.
• Whether you made identical wagers (explained next).
• Whether someone else is entitled to any part of the winnings subject to withholding. If so, you must complete Form 5754, Statement by Person(s) Receiving Gambling Winnings, and return it to the payer. The payer will use it to prepare a Form W-2G for each of the winners.

Identical wagers.   You may have to give the payer a statement of the amount of your winnings, if any, from identical wagers. If this statement is required, the payer will ask you for it. You provide this statement by signing Form W-2G or, if required, Form 5754.

Identical wagers include two bets placed in a pari-mutuel pool on one horse to win a particular race. However, the bets are not identical if one bet is to win and one bet is to place. In addition, they are not identical if the bets were placed in different pari-mutuel pools. For example, a bet in a pool conducted by the racetrack and a bet in a separate pool conducted by an offtrack betting establishment in which the bets are not pooled with those placed at the track are not identical wagers.

Backup withholding on gambling winnings.   If you have any kind of gambling winnings and do not give the payer your social security number, the payer may have to withhold income tax at the rate of 30%. This rule applies to keno winnings of more than $1,500, bingo and slot machine winnings of more than $1,200, and certain other gambling winnings of more than $600.

Unemployment Compensation

You can choose to have income tax withheld from unemployment compensation. To make this choice, you will have to fill out Form W-4V (or a similar form provided by the payer) and give it to the payer. The amount withheld will be 10% of each payment.

Unemployment compensation is taxable. So, if you do not have income tax withheld, you may have to make estimated tax payments. See chapter 2.

If you do not pay enough tax either through withholding or estimated tax, you may have to pay a penalty. See chapter 4.

Form 1099-G.   If income tax is withheld from your unemployment compensation, you will receive a Form 1099-G, Certain Government Payments. Box 1 will show the amount of unemployment compensation you got for the year. Box 4 will show the amount of tax withheld.

Federal Payments

You can choose to have income tax withheld from certain federal payments you receive. These payments are:

1. Social security benefits,
2. Tier 1 railroad retirement benefits,
3. Commodity credit loans you choose to include in your gross income, and
4. Payments under the Agricultural Act of 1949 (7 U.S.C. 1421 et seq.), or title II of the Disaster Assistance Act of 1988, as amended, that are treated as insurance proceeds and that you received because:
   1. Your crops were destroyed or damaged by drought, flood, or any other natural disaster, or
   2. You were unable to plant crops because of a natural disaster described in (a).

To make this choice, you will have to fill out Form W-4V (or a similar form provided by the payer) and give it to the payer. For 2002, you can choose to have 7%, 10%, 15%, or 27% of each payment withheld.

If you do not choose to have income tax withheld, you may have to make estimated tax payments. See chapter 2.

If you do not pay enough tax either through withholding or estimated tax, you may have to pay a penalty. See chapter 4.

More information.   For more information about the tax treatment of social security and railroad retirement benefits, get Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Get Publication 225, Farmer's Tax Guide, for information about the tax treatment of commodity credit loans or crop disaster payments.

Backup Withholding

Banks or other businesses that pay you certain kinds of income must file an information return (Form 1099) with the IRS. The information return shows how much you were paid during the year. It also includes your name and taxpayer identification number (TIN). TINs are explained later in this discussion.

These payments generally are not subject to withholding. However, backup withholding is required in certain situations.

Payments subject to backup withholding.   Backup withholding can apply to most kinds of payments that are reported on Form 1099. These include:

• Interest payments (Form 1099-INT),
• Dividends (Form 1099-DIV),
• Patronage dividends, but only if at least half the payment is in money (Form 1099-PATR),
• Rents, profits, or other gains (Form 1099-MISC),
• Commissions, fees, or other payments for work you do as an independent contractor (Form 1099-MISC),
• Payments by brokers (Form 1099-B),
• Payments by fishing boat operators, but only the part that is in money and that represents a share of the proceeds of the catch (Form 1099-MISC), and
• Royalty payments (Form 1099-MISC).

Backup withholding may also apply to gambling winnings. See Backup withholding on gambling winnings under Gambling Winnings, earlier.

Payments not subject to backup withholding.   Backup withholding does not apply to payments reported on Form 1099-MISC (other than payments by fishing boat operators and royalty payments) unless at least one of the following three situations applies.

1. The amount you receive from any one payer is $600 or more.
2. The payer had to give you a Form 1099 last year.
3. The payer made payments to you last year that were subject to backup withholding.

Form 1099 and backup withholding are generally not required for a payment of less than $10.

Withholding rules.   When you open a new account, make an investment, or begin to receive payments reported on Form 1099, the bank or other business will give you Form W-9, Request for Taxpayer Identification Number and Certification, or a similar form. You must show your TIN on the form and, if your account or investment will earn interest or dividends, you also must certify (under penalties of perjury) that your TIN is correct and that you are not subject to backup withholding.

For 2002, the payer must withhold at a flat 30% rate in the following situations.

• You do not give the payer your TIN in the required manner.
• The IRS notifies the payer that the TIN you gave is incorrect.
• You are required, but fail, to certify that you are not subject to backup withholding.
• The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 120-day period.

Taxpayer identification number (TIN).   Your TIN is one of the following three numbers.

1. Your social security number (SSN).
2. Your employer identification number.
3. An IRS individual taxpayer identification number (ITIN). Aliens who do not have an SSN and are not eligible to get one should get an ITIN. Form W-7, Application for IRS Individual Taxpayer Identification Number, is used to apply for an ITIN.

An ITIN is for tax use only. It does not entitle you to social security benefits or change your employment or immigration status under U.S. law. For more information on ITINs, get Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number.

How to prevent or stop backup withholding.   If you have been notified by a payer that the TIN you gave is incorrect, you can usually prevent backup withholding from starting or stop backup withholding once it has begun by giving the payer your correct name and TIN. You must certify that the TIN you give is correct.

However, the payer will provide additional instructions if the TIN you gave needs to be validated by the Social Security Administration or by the IRS. This may happen if both the following conditions exist.

1. The IRS notifies the payer twice within 3 calendar years that a TIN you gave for the same account is incorrect.
2. The incorrect TIN is still being used on the account when the payer receives the second notice.

Underreported interest or dividends.   If you have been notified that you underreported interest or dividends, you must request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. You must show that at least one of the following situations applies.

• No underreporting occurred.
• You have a bona fide dispute with the IRS about whether an underreporting occurred.
• Backup withholding will cause or is causing an undue hardship and it is unlikely that you will underreport interest and dividends in the future.
• You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments.

If the IRS determines that backup withholding should stop, it will provide you with certification and will notify the payers who were sent notices earlier.

Penalties.   There are civil and criminal penalties for giving false information to avoid backup withholding. The civil penalty is $500. The criminal penalty, upon conviction, is a fine of up to $1,000 or imprisonment of up to one year, or both.

Estimated Tax for 2002

Important Changes for 2002

Estimated tax safe harbor for higher income individuals.   For installment payments for tax years beginning in 2002, the estimated tax safe harbor for higher income individuals (other than farmers and fishermen) has been modified. If your adjusted gross income is more than $150,000 ($75,000 if married filing a separate return), your withholding and estimated tax payments must be at least the smaller of 90% of your tax liability for 2002 or 112% of the tax shown on your 2001 return (provided your 2001 return covered all 12 months) to avoid an estimated tax penalty.

Important Reminders

Who must pay estimated tax.   You must pay estimated tax unless the total tax shown on your return minus the amount you paid through withholding (including excess social security and railroad retirement tax withholding) will be less than $1,000.

Payment of estimated tax by electronic funds withdrawal.   You may be able to pay your estimated tax by authorizing an automatic withdrawal from your checking or savings account. For more information, see Payment by Electronic Funds Withdrawal under How To Pay Estimated Tax, later.

Employment taxes on household employees.   If you either receive income from which tax is withheld or must make estimated tax payments, you must include any expected employment (social security, Medicare, and federal unemployment) taxes for household employees when figuring your estimated tax.

Introduction

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or by making estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period (see When To Pay Estimated Tax, later), you may be charged a penalty even if you are due a refund when you file your tax return. For information on when the penalty applies, see chapter 4.

It would be helpful for you to keep a copy of your 2001 tax return and an estimate of your 2002 income nearby while reading this chapter.

Topics

This chapter discusses:

• Who must make estimated tax payments,
• How to figure estimated tax (including illustrated examples),
• When to pay estimated tax,
• How to figure each payment, and
• How to pay estimated tax.

Useful Items You may want to see:

Publication

• 553   Highlights of 2001 Tax Changes

Form (and Instructions)

• 1040-ES   Estimated Tax for Individuals

See chapter 5 for information about how to get this publication and form.

Who Must Make Estimated Tax Payments?

If you had a tax liability for 2001, you may have to pay estimated tax for 2002.

General Rule

You must make estimated tax payments for 2002 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2002, after subtracting your withholding and credits, and
2. You expect your withholding and credits to be less than the smaller of:
   1. 90% of the tax to be shown on your 2002 tax return, or
   2. 100% of the tax shown on your 2001 tax return. Your 2001 tax return must cover all 12 months.

If all your income will be subject to income tax withholding, you probably do not need to make estimated tax payments.

Example 2.1.   To figure whether she should pay estimated tax for 2002, Jane, who files as head of household, uses the following information.

Expected AGI for 2002	$61,125
AGI for 2001	$58,950
Tax shown on 2001 return	$10,500
Tax expected to be shown on 2002 return	$11,500
Tax expected to be withheld in 2002	$10,400

Jane uses Figure B (on the next page). Jane's answer to the chart's first question is YES - she expects to owe at least $1,000 for 2002 after subtracting her withholding from her expected tax ($11,500 - $10,400 = $1,100). Her answer to the chart's second question is also YES - she expects her income tax withholding ($10,400) to be at least 90% of the tax to be shown on her 2002 return ($11,500 × 90% = $10,350). Jane does not need to pay estimated tax.

Example 2.2.   The facts are the same as in Example 2.1, except that Jane expects only $8,500 tax to be withheld in 2002. Because that is less than $10,350, her answer to the chart's second question is NO.

Jane's answer to the chart's third question is also NO - she does not expect her income tax withholding ($8,500) to be at least 100% of the tax shown on her 2001 return ($10,500). Jane must make estimated tax payments for 2002.

Example 2.3.   The facts are the same as in Example 2.2, except that the tax shown on Jane's 2001 return was $8,000. Because she expects to have more than $8,000 withheld in 2002, her answer to the chart's third question is YES. Jane does not need to pay estimated tax for 2002.

Married Taxpayers

To figure whether you must make estimated tax payments, apply the rules discussed here to your separate estimated income. If you can make joint estimated tax payments, you can apply these rules on a joint basis.

You and your spouse can make joint estimated tax payments even if you are not living together.

You and your spouse cannot make joint estimated tax payments if:

1. You are legally separated under a decree of divorce or separate maintenance,
2. Either spouse is a nonresident alien, or
3. You and your spouse have different tax years.

Whether you and your spouse make joint estimated tax payments or separate payments will not affect your choice of filing a joint tax return or separate returns for 2002.

2001 separate returns and 2002 joint return.   If you plan to file a joint return with your spouse for 2002, but you filed separate returns for 2001, your 2001 tax is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.

2001 joint return and 2002 separate returns.   If you plan to file a separate return for 2002, but you filed a joint return for 2001, your 2001 tax is your share of the tax on the joint return. You file a separate return if you file as single, head of household, or married filing separately.

To figure your share of the tax on a joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2001 using the same filing status as for 2002. Then multiply the tax on the joint return by the following fraction:

The tax you would have paid had you filed a separate return

The total tax you and your spouse would have paid had you filed separate returns

Example 2.4.   Joe and Heather filed a joint return for 2001 showing taxable income of $48,000 and a tax of $7,557. Of the $48,000 taxable income, $40,000 was Joe's and the rest was Heather's. For 2002, they plan to file married filing separately. Joe figures his share of the tax on the 2001 joint return as follows:

Tax on $40,000 based on a separate return	$8,172
Tax on $8,000 based on a separate return	1,204
Total	$9,376
Joe's percentage of total ($8,172 ÷ $9,376)	87%
Joe's share of tax on joint return tax ($7,557 × 87%)	$6,575

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