Question of the Day - 15 May 2017

As always, this is a matter of rendering unto Caesar the things that are Caesar’s—Caesar in this case being, of course, Uncle Sam.

The following information is taken from our book Tax Help for Gamblers, the most comprehensive guide to gambling and taxes ever written, whether you’re a pro, recreational player, or in this case a foreigner who hits a jackpot in the U.S., written by Jean Scott and Marissa Chien (an IRS enrolled agent who also happens to be an advantage player).  

The rules for taxation and withholding tax for non-resident-alien (NRA) gamblers vary, depending on the tax treaties in force between their countries and the U.S. The IRS lists a couple dozen countries, mostly in Europe, whose residents are exempt from U.S taxation on gambling income; Costa Rica isn’t one of them. Also note that this is true only of jackpots that exceed the $1,200 reporting threshold; no tax is withheld from wins on table games.

All non-residents who aren’t exempt and hit a jackpot are issued Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. It depends on the terms of their countries’ treaties with the U.S., but most of these non-residents will have U.S. income tax withheld, usually at a rate of 30% of the gross amount of the win.

(Non-residents from countries with a no-taxation treaty should not depend on the casino to have up-to-date treaty information. These players should always carry Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to show the casino in case of a big win. Although they will still get paperwork, no tax will be withheld.)

Of course, this begs the question, is there any way to get back the U.S. tax that’s withheld from the jackpot?

Some non-residents, again depending on which country they come from, have the option of getting back some or all of the amount withheld, but to do so they have to file Form 1040NR, the non-resident income-tax form, with the IRS. However, it’s not as simple as that.

Same as for U.S. citizens, foreign players must have good records in order to itemize their losses to offset their winnings. Therefore, non-residents, especially those who often gamble in the U.S., should keep a gaming log. You never know when you’ll get lucky and win a jackpot big enough for Uncle Sam to take a piece.

Another smart thing a non-resident should do before beginning to gamble in the U.S. is to apply for an Individual Taxpayer Identification Number (ITIN). This number is the equivalent of a resident’s Social Security number and can be given to a casino when hitting a jackpot that requires the 1042-S form described above. You could wait to see if you do hit a jackpot, but then your 1042-S would not have this number on it. You’re required to have an ITIN if you want to file a 1040NR for a refund of the withholding tax, and it’s much simpler if the IRS can match up all documents with the same ITIN number.

The easiest way to get an ITIN is to apply for it while you’re in the U.S. You can download Form W-7, Application for IRS Individual Taxpayer Identification Number, from the IRS website and take the completed form and your ID requirements (such as a passport) to an IRS office. There’s no charge for this. Or you can apply at a U.S. embassy abroad. You can also apply by mail as long as you submit certified copies of documents, such as a passport. You can get your documents certified at a U.S. consulate, but there may be a charge for this.

There are also “jackpot-recovery” companies that will help you with filing forms and obtaining the ITIN. Fees for this service tend to be high, usually 25%-30%, but sometimes as high as 50%, of amounts recovered. However, this may be worth it to some people, because part of their service includes dealing with casino accounting departments and obtaining win/loss data.

In the end, the decision is whether to go through the whole IRS process, simply forget about the 30% that’s withheld, or play a table game that’s not subject to tax withholding.