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Congrats, you won your March Madness pool! Now it's time to pay the IRS

"All gambling winnings are taxable. It's ordinary income — the same tax rate as your paycheck."

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The Baylor Bears celebrate with the trophy after their win against the Gonzaga Bulldogs in the National Championship game of the 2021 NCAA Men's Basketball Tournament at Lucas Oil Stadium on April 05, 2021 in Indianapolis, Indiana.
Jamie Schwaberow | NCAA Photos | Getty Images

Monday's NCAA Men's Basketball Tournament final between Baylor and Gonzaga wrapped up one of America's favorite times of year to gamble.

More than 47 million Americans were expected to have placed a wager on March Madness this year, according to the American Gaming Association. In all, they wagered an estimated $10 billion, according to sports handicapping site BetFirm. With 25 states and Washington, D.C., now offering legal sports betting, some of that money likely flowed through legitimate avenues this year, although BetFirm experts say much of the action still comes from, ahem, less-than-legal bracket pools.

Don't worry — if you won your office's pool, it's unlikely that Joyce from accounting is calling the Feds. But if you're among the lucky few that scored a big windfall after Baylor's win Monday, it's important to keep in mind that Uncle Sam will want his share of your gambling winnings, whether they came from a legal source or not. Here's what you need to know.

You owe taxes on off-the-books gambling wins

No matter which way you gambled on the tournament — through a casino, an online promotion, an app, your bookie, or with your office mates — you'll owe a chunk of the money to the IRS. "All gambling winnings are taxable," says Tim Gagnon, an associate professor of accounting at Northeastern University. "It's ordinary income — the same tax rate as your paycheck."

If your winnings came through legitimate avenues, you may receive tax documents along with the money. Depending on the type of gambling you're doing, you'll typically receive a form W-2 G if your winnings exceed $600 and the payout is at least 300 times the amount of your wager. Larger thresholds apply for winnings from slots, keno, and poker tournaments.

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In the cases where you entered a contest without making a wager and won a prize (think ESPN's Men's Tournament Challenge, which was free to enter and came with a grand prize worth $18,000), you should receive a form 1099-MISC if the fair market value of the prize exceeds $600.

But just because there's a $600 threshold for legal gambling entities to report your winnings to the IRS doesn't mean you aren't responsible for reporting smaller wins from those legit sources. The same rules apply for money you won under the table, too. "You should report every dollar you win as income," says Lisa Greene-Lewis, a certified public accountant and editor of the TurboTax blog.

You can deduct some of your gambling losses

If, like most gamblers, your losses outnumber your wins, there's a small silver lining for you. Gambling losses are deductible — with some caveats. First, unless you're a professional gambler, you'll have to itemize to claim the deduction, a practice that has all but died out among taxpayers since the standard deduction was doubled to $12,000 in 2017 under the Tax Cuts and Jobs Act.

And being a big loser won't help unless you're looking to offset a big win. The amount of gambling losses you deduct cannot exceed the income from gambling winnings that you report on your return.

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Still, if you're looking to lessen the tax impact of a big windfall, it may make sense to claim your losses. Just make sure you keep track of your losing bets. "Hang on to all of those bum lottery tickets," says Gagnon, adding that, while the IRS will demand tax on illegal gambling winnings, they won't accept losses you incurred with your local bookie.

If you're a casino gambler who plays with a loyalty card, you can likely find a record of your wins and losses on the casino's loyalty program website.

"The IRS won't approve deductions of losses through illegitimate means," Gagnon says. "It's the same with illegal marijuana operations, who have to report income but can't deduct business expenses."

Consider making moves now to avoid a surprise tax bill

In certain cases, the IRS will require a gambling institution to withhold 24% of your winnings for income taxes. But if your winnings from the NCAA tournament came in the form of a Venmo payment or an envelope full of $20 bills, you'll have to work out the tax situation for yourself.

And it may make sense to give Uncle Sam his share early to avoid a surprise bill at tax time.

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One way to do that is to pay estimated tax for the quarter in which you received the windfall, says Gagnon. "Look at your marginal tax rate from last year to get an idea of what percentage you'll owe," he says. "If you won a very large amount, it may jump you up to the next bracket." Estimated tax payments are due June 15 for income earned between April 1 and May 31.

If you're a salaried worker, another option is to have your company withhold more on your next few paychecks by filing a form W-4 with your company's HR department, says John Wheeler, a CPA and senior financial consultant at Castle Wealth Advisors in Indianapolis, Indiana. "The greater the percentage of your windfall is relative to your earnings, the more important it is that you deal with this," he says.

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