State Tax On Winnings

A wager made inside a state sometimes matters for tax purposes, even if you are a nonresident. Pennsylvania taxes nonresident individuals, estates or trusts on gambling and lottery winnings derived from sources within Pennsylvania, and says wins are sourced there when the wager is placed in the Commonwealth, the game is conducted there, or a Pennsylvania lottery prize is redeemed there.

The sourcing rule can also work in reverse for reassuring effects. Pennsylvania says nonresident gambling and lottery winnings from wagers, games, or prize redemption outside Pennsylvania are not taxed by Pennsylvania. But the sourcing rule can still create temporary tax claims: one state may require withholding of gambling winnings from nonresident players, and the home state may levy its own tax before providing credit for the other state.

The IRS requires withholding on certain gambling income paid to nonresident aliens or foreign entities, with Massachusetts summarizing that gambling winnings paid to a foreign person are generally subject to 30 percent withholding and reporting on Form 1042 and Form 1042-S.

The sourcing rule applies to cross-state gamblers from an ordinary resident's home state, too. Massachusetts says IRC § 3402(q) triggers withholding on certain gambling winnings, including on income sourced and taxed by another state. New York’s advisory opinion TSB-A-02(4)I shows a state allowing a resident credit for income another state has already sourced and taxed. Illinois goes the other way: its guidance on the credit for tax on gambling wins notes that the credit usually comes to zero for a nonprofessional gambler.

Credit claims are especially hard for ordinary gamblers to navigate, because Illinois says that gambling winnings are sourced to the residence of the individual winner and are not included in the computation of the credit cap for many nonprofessional gamblers. It may be more common for a nonresident win to face a temporary double tax: a foreign-state withholding or taxed win, followed by a resident-state tax, that may only partially credit.

But the good news is that some states have no state income tax on gambling winnings at all. According to Investopedia, the following nine states assess no state income tax on gambling winnings: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

A state's first move to withhold tax from nonresidents earns the most focus, because it turns a possibly remote claim into a real nudge for a resident-winning gambler to check tax laws. Arizona and Maryland are unique for actually withholding from nonresidents at the source.

The point is narrow. A state may tax a nonresident on a wager placed inside it, the home state may tax the same win again, and the resident credit meant to square the two does not work the same way everywhere.