Exclusion of Certain Horse-Racing and Dog-Racing Gambling Winnings from the Income of Nonresident Alien Individuals |
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Sec. 419 of the American Jobs Creation Act of 2004 provides an exclusion from gross income under I.R.C. section 872(b) for winnings paid to a nonresident alien resulting from a legal wager initiated outside the United States in a pari-mutuel pool on a live horse or dog race in the United States, regardless of whether the pool is a separate foreign pool or a merged U.S. - foreign pool.
Background
I.R.C. §871(a)(1) imposes a 30% federal income tax on income of nonresident aliens derived from sources within the United States. The party making the payment of income to the nonresident alien has the obligation to withhold 30% federal income tax under I.R.C. §1441(a). Under prior law, the source of the winnings, and thus the applicability of the withholding tax, depended on the type of the wagering pool from which the winnings were paid. If the payout was made from a separate foreign pool, maintained completely in a foreign jurisdiction (e.g., a pool maintained by a betting parlor in a foreign country), then the winnings paid to the nonresident alien were not subject to the tax, because the income was not from a U.S. source. However, if the payout was made from a “merged” or “common” pool, which included wagers from inside the United States, then the portion of the payout attributed to wagers placed in the United States was subject to withholding tax. The party making the payment was responsible for withholding the tax.
Note that, even under prior law, certain tax treaties exempted gambling income from withholding if the winners were nonresident alien from those treaty countries. Refer to Publication 515 and Publication 901. Taxpayers claiming treaty exemptions from withholding must have a U.S. Individual Taxpayer Identification Number (ITIN), and should file Form W-8BEN (PDF) with the withholding agent to claim such treaty exemptions.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.
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Page Last Reviewed or Updated: November 04, 2008