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Tennessee Online Sports Betting Taxes
Tennessee sports betting officially became state-regulated with its launch on Nov.1 2020. Consequently, licensed operators are required to abide by certain standards and report their revenue to the federal government. Tennessee sports betting apps are now available in the palm of your hand – quite literally.
Among jurisdictions with legal sports betting, Tennessee is unique. There are no brick-and-mortar sportsbooks in the state.
Tennessee mandates that its licensed operators only pay out a certain percentage of the money they handle. However, it’s a fantastic place to gamble, as the Tennessee sports betting tax rate is 0%, meaning those winning money in Tennessee will only be required to pay the standard federal tax.
What are the tax rates?
Tax rates depend on your annual income and tax bracket. Gambling income is subject to state and federal taxes but not FICA taxes, and the rate will depend on your total taxable income (not just wages) minus deductions (standard or itemized).
Gambling winnings are subject to a 24% withholding for federal tax, though the actual amount you owe on your gambling win will depend on your total income. That tax is automatically withheld on winnings that reach a specific threshold.
Tennessee has no state-earned income tax. However, your winnings may be subject to the Hall Income Tax for the 2020 tax year and prior years. This all depends on how you use those funds. The state doesn’t consider your lottery and sports betting winnings themselves taxable income. But, if you use the money to produce certain kinds of dividends and interest, the state may tax those dividends and interest. Many exceptions to the taxable dividends and interest list include interest paid on personal savings accounts — the Hall Income Tax sunset on Jan. 1, 2021.
HIT-4 - Hall Income Tax Rate
Beginning January 1, 2017, the General Assembly reduced the Hall income tax rate by 1% each tax year through the year beginning January 1, 2020. The Hall income tax is fully repealed for tax years beginning January 1, 2021.
Effective Dates for Tax Rates:
- 4% for tax years beginning January 1, 2017, and prior to January 1, 2018
- 3% for tax years beginning January 1, 2018, and prior to January 1, 2019
- 2% for tax years beginning January 1, 2019, and prior to January 1, 2020
- 1% for tax years beginning January 1, 2020, and prior to January 1, 2021
- Full repeal for tax years beginning January 1, 2021 and onwards
Taxes are broken up differently starting with your Marginal tax rate which is the bracket your income falls into. Then you have your Effective tax rate which is the actual percentage you pay after standard deductions, etc., and operate on a sliding scale depending on filing status and total taxable income. The rules state that when gambling, a person's winnings are to be combined with their annual income; which could move them into a higher tax bracket, hence why it’s important to be aware of gambling income before starting tax preparation. Casinos withhold 25% of winnings for those who provide a Social Security number. If you do not provide your Social Security number, the payer may withhold 28%.
How to pay taxes?
The first step is to understand that all gambling winnings are completely taxable and the income must be reported on your tax return. Gambling income includes but isn't limited to winnings from lotteries, raffles, horse races, and casinos. It also includes cash winnings and the fair market value of prizes, such as cars and trips. Depending on the amount of winnings, bettors may receive a W-2G form , which is sent by the payor (casino, pari-mutuel operator, sportsbook, online casino, online sportsbook, etc). The form reveals the amount of winnings and if any tax was withheld. A copy of that W-2G is sent to the Internal Revenue Service. You must report all gambling winnings as "Other Income" on Form 1040 or Form 1040-SR, including winnings that aren't reported on a W-2G. When you have gambling winnings, you may also be required to pay an estimated tax on that additional income.
If your winnings were non-cash prizes, such as an automobile or vacation trip, the IRS instructs you to report the fair market value of each prize. Non-residents with winnings at Tennessee based Online Sports Books are subject to the state tax.
You may deduct gambling losses only if you itemize your deductions on (Form 1040) and keep a record of your winnings and losses. The amount of losses you deduct can't be more than the amount of gambling income you reported on your return. Claim your gambling losses up to the amount of winnings, as "Other Itemized Deductions."
So if you had $4,000 in winnings and $10,000 in losses last year, your deduction would be limited to $4,000. The remaining $6,000 cannot be carried over.
The IRS may request that you substantiate gambling wins and losses.
Your documentation may include:
- Form(s) W-2G.
- Form 5754 (group gambling winnings)
- Wagering tickets with dates, location and amounts won/lost. Also provide names of anyone who gambled with you, if applicable.
- Canceled checks or credit records.
- Financial and bank statements.
Tennessee sports betting hold
The Tennessee Education Lottery requires sportsbooks to hold 10% of annual wagers, in other words, player payouts must not exceed 90% of all wagering activity for the year. According to the new emergency regulations set forth by the Sports Wagering Advisory Council, operators can now opt to pay a compliance fee if they fall short of a 10% annual hold. By doing so, they can avoid having the infraction appear on their “permanent record”.
Where does the sports betting tax go?
Tennessee charges sportsbooks a 20% sports betting “privilege tax”. This rate is relatively high compared to fellow jurisdictions, however, tax rates vary drastically across the US when it comes to sports betting. Nevada imposes a 6.75% tax rate, while comparatively, Rhode Island sits at 51%.
The Tennessee Education Lottery’s Lottery for Education account receives 80% of this tax revenue. The account helps fund scholarships and grants for students statewide. Over 15 scholarship programs share these funds. After this, 15% of the remaining tax revenue goes to local governments for use on roads and other infrastructure projects.
The final 5% goes toward state-funded gambling addiction programs organized by the Tennessee Department of Mental Health and Substance Abuse.
In the first year alone, sports betting generated almost $1.8 million in funding for Tennessee's responsible gambling programs. Tennessee intends to further boost its responsible gambling initiatives as gaming expands.