Casino Winnings and Annuity Payments

A lucky night at the casino comes with a number of financial decisions, including deciding whether to receive winnings as a lump sum or structured settlement. Both payout options are subject to inflation and can be cashed in for immediate money.

Receiving Casino Winnings

Winning big at the casino can come with a number of tax implications and financial decisions, specifically when choosing the best payout method. Typically, winnings are placed in a structured settlement providing consistent payments for a determined period of time. But what if you want the winnings now? In this case, winners can choose to sell a portion or all of their casino settlement in exchange for a lump sum of cash.

While receiving a one-time lump sum allows winners to address bigger financial emergencies, including paying for college tuition or medical expenses, receiving a lump sum payment can also negatively influence spending and saving habits. In addition, lump sum payments are taxed as ordinary income, though you only have to pay them one time.

On the other hand, receiving casino winnings as a structured settlement provides a controlled income stream over a longer period. Payments are not taxed until they are disbursed, allowing for interest to accrue over time. However, this payout option limits the amount of cash a winner receives at one time, especially if additional funds are needed for financial emergencies.

Winning Big: Payment Methods & Taxes

You’ve just had a lucky night. While you are still in the casino, you will need to provide identification and sign IRS tax forms in order to accept your prize. And then you get your money, right?

Not exactly.

Casinos have various ways of paying winners. Generally, if the winnings are $25,000 or less, winners can choose between cash or check. If the winnings are larger, the options may change depending on the location of the casino and the game gambled upon.

Some games allow for a lump sum disbursement, where the money is paid upfront. Other games disburse winnings through an annuity, where the money is paid in installments. Often, winners have up to 90 days to decide whether they want a lump sum or annuity, though in some cases they are not given a disbursement option, and only a lump sum is offered.

Winnings of $5,000 or higher are taxed as ordinary income and can bump winners to a higher tax bracket.

All winnings — specifically from lottery payouts, poker tournaments, horse races and slot machines — are taxable at the federal level, and some may be taxable at the state level, too. Since each state has its own set of regulations for gambling taxes, be sure to pay close attention to the local requirements before filing your next tax return. In addition to state tax, the IRS also taxes gambling winnings. For certain games and for larger winnings, winners will need to file IRS Form W2-G. No matter the amount, all winnings must be reported on the next tax return if the earnings meet certain thresholds:

  • $600 or more at a horse track, if the amount is at least 300 times your bet
  • $1,200 or more from a slot machine or bingo game
  • $1,500 or more in keno winnings
  • $5,000 or more in a poker tournament winnings

If winnings meet or exceed the above thresholds, the casino will withhold up to 25 percent of your winnings in taxes before disbursing the final amount. Winners can expect to receive a W2-G tax form outlining the transaction.

Lump Sum vs. Annuity Payments for Casino Winnings

The quickest way to determine how winnings are disbursed is to look at the faces of common slot machines. It will clearly disclose whether the machine is an annuity game or an immediate full-pay win.

If you are given a the choice of payout options, it may be wise to consult with a certified financial planner, tax attorney or certified public accountant to help determine the best decision.

Each payout method comes with its own set of tax implications, including higher interest rates. Choosing how to receive your winnings determines how much you cash in.

Choosing the lump sum option from the casino means settling for cash at a discounted rate of 50 to 60 percent of the total winnings. The lump sum discount rate is determined through either the current prime rate or a rate formulated from U.S. Treasury securities chosen by the licensee.

While this option provides a bulk of cash all at once, winners have to pay taxes on the sum in its entirety the same year it is distributed. However, the taxes are paid only once. This option may work best for those looking to pay off debt or address other immediate financial needs.

Claiming a casino annuity means committing your winnings to a long-term payment plan that can take 20 to 30 years to fully disburse. This guarantees an additional income stream over time. Generally, winnings are paid at the minimum amount annually. To help understand what this looks like, here are some annuity regulations from Vegas, provided by the Nevada Gaming Control Board:

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  • Periodic payments are used for prizes of $100,000 or more.
  • If the prize is between $100,000 and $200,000, payments will amount to at least $10,000 annually.
  • If the prize is more than $200,000, the annual payments will not be less than 5 percent of the total amount.

However, leaving casino winnings in an annuity sacrifices some of the value of your money. There are three primary ways you can lose out.

  • Inflation – Inflation can affect the buying power of payments in a negative way if the dollar substantially drops. The amount you receive this year from the annuity will not be able to buy the same amount of goods years from now.
  • Depreciation – The winnings could be earning interest over time rather than depreciating due to inflation. If you had cash in hand, you could put it in a tax-advantaged and interest-bearing account.
  • Limited Access to Cash – Having cash now enables you to make purchases today, rather than waiting until years down the road.

Page Sources

  1. Backman, M. (2017, January 19). Are Gambling Winnings Taxed? Retrieved from https://www.fool.com/retirement/2017/01/19/are-gambling-winnings-taxed.aspx
  2. Green, L. (2015, February 23). Casino Winnings: Pay Me Now or Later? Retrieved from http://dolphinassetgroup.com/2015/02/23/casino-winnings-pay-me-now-or-later/
  3. Pilarski, M. (2010, June 18). Deal Me In: Payment in installments or lump sum? Retrieved from http://pilarski.casinocitytimes.com/article/deal-me-in-payment-in-installments-or-lump-sum-58673
  4. Ritchie, J. (2017, May 6). How Are Gambling Winnings Taxed? Retrieved from https://blog.turbotax.intuit.com/income-and-investments/how-are-gambling-winnings-taxed-8891/
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