Withholding Tax Practice

Court Ruling Changes Withholding Tax Practice

A recent court ruling may change the experience of non-US citizens who gamble at casinos in the United States for the better.

As many non-US citizens have found out, occasionally to their dismay, the United States taxes most gambling winnings. In many gambling establishments, that gambling winnings tax is withheld from the amount won, and paid directly by the establishment to the IRS, in order to avoid gambling income being misreported when the year’s taxes are filed. For non-US residents, the tax rate for gambling winnings is 30%, which means a significant amount is withheld from any sizable win.

In 2008, the IRS ruled that US citizens and resident aliens – that is, non-US citizens who are permanent residents of the United States – could calculate their winnings on a per-session basis rather than a per-wager basis. Rather than computing their gains or losses for each individual wager, they would be taxed on their net winnings at the close of a single gambling session. So if a hypothetical gambler had a $5000 win, but over the course of the night ended up losing that $5000 on taxable games, they wouldn’t have tax withheld from their winnings upon cashing out, as they would not have made a net gain over the course of the gambling session.

However, at the time, the per-session rule wasn’t applied to non-resident aliens who gambled in the United States. Instead, they were taxed on each individual wager, provided the win was over a certain threshold – typically $1200. This meant that a non-US citizen who had the same luck as our hypothetical American gambler could expect to leave behind 30% of that $5000 win – $1500 all together – in spite of the fact that they wouldn’t have been walking out of the casino with any more money in their pocket than they’d walked in with.

While citizens of countries with tax treaties covering gambling winnings taxes (Canada among them) could certainly recover some or all of the taxes withheld, the method of calculating the amount withheld in the first place could be a bitter pill to swallow – even more so for a gambling session ending in a net loss before taxes were applied.

The ruling handed down on July 9th by the US Court of Appeals for the District of Columbia Circuit has changed those rules. While non-US residents are still taxed on their gambling winnings, the court ruled that the amount of those winnings should be determined on a per-session basis, just as they are for US citizens – so while a visiting gambler can still expect to have taxes withheld on a significant net win, they will no longer have to worry about effectively paying to lose.

While this ruling may diminish the amount of money lost to gambling withholding taxes by non-US residents, it’s still worthwhile to engage the services of a US Tax Recovery firm if you gamble and win in a casino in the United States. It may be possible to recover some or all of your lost winnings – and while not having to pay to lose is a pleasant change, not having to pay to win will feel even better.