Gambling is an ever-popular pastime, but did you know that gambling can have very serious tax implications? These are crazy and in my opinion are unfair, but they are in the tax law and courts have had their say to uphold them.
Theoretically, the full amount of gambling winnings (unless you qualify as a professional gambler, which this post assumes that you are not) must be reported on the miscellaneous income line of Form 1040, page 1. Winnings include cash, prizes, jackpots, lottery winnings, raffles, as well as installment payments on winnings.
For most types of gambling at legitimate gaming facilities, you’ll receive a Form W-2G if you win over certain amounts. These must be reported on the miscellaneous income line. When you get one of these forms remember that the IRS also gets a copy of the form, and the IRS computers will be looking for these amounts on your tax return. If they don’t find them, the computer will spit out a notice of tax deficiency.
Many people think that just because they might win some jackpots, but lose money overall they do not need to report the winnings. This is not true, they must show these winnings.
That being said, you may (assuming you’ve kept the required proof and documentation) deduct your gambling losses but only to the extent of gambling winnings. This deduction is taken on Schedule A in the miscellaneous itemized deduction section. Now gamblers who may not have enough Schedule A deductions itemize cannot get a tax deduction for these losses.
You can see the problem here. Even though there is technically a deduction for losses to extent of winnings, a taxpayer may not get the deduction and even if they do get to take it, they may not get full benefit due to mathematical computations that have to be made.
In addition, since you must include the entire amount of winnings on page 1, this increased your Adjusted Gross Income (AGI) and this could devastating effects on your taxes since there are a good number of limitations that are driven by AGI. For example, taxable Social Security benefits are driven higher by a higher AGI figure. Rental real estate losses are phase out by higher income. The child tax credit, education credits and other items are potentially reduced or eliminated by higher AGI. Also any allowable medical deduction on Schedule A is reduced as AGI increases. These are some but there are more, but you get the idea.
Documentation Wagering Losses: The IRS allows players to simply record the net winning or net loss from each gambling session. A session is deemed to end when a player cashes out or runs out of money. At this point it’s possible to calculate how much was won or lost during that particular session. The taxpayer/player then reports the sum of all the net winning sessions on page 1 of the tax return, and the net sum of all the losing sessions on Schedule A miscellaneous itemized deductions. Care must be taken to assure that the total net winning session totals are greater than or exceed the total of Forms W-2G’s received and make adjustments to assist the IRS computers in matching the numbers, or there will be a letter from them.
Gambling losses must be adequately documented to be deductible. Under IRS Revenue Procedure 77-29, an amateur gambler must record the following information in a log or similar record:
- Date and type of specific wager or wagering activity,
- Name and location of the establishment,
- Amount won or lost
- Names of any other people present with you at the gaming establishment,
- Slot machine #, table #,
- Winning statements and unredeemed tickets,
- Bank withdrawal slips, ATM advances and such with the dates showing the source of the ‘gambled’ funds.
For a handy Gambling Log and info, click below and print out the handout:
There’s no place for gambling when it comes to preparing your federal and state tax returns. Play it safe and take this article to heart if you plan to hit the casino or racetrack. The IRS and courts require that these records are kept in close proximity in time to the gambling trip so don’t wait to recreate the required records, do them now.
If you have questions on how to do this or think you may have an issue in this area, please call me at (805) 264-3305. Also I have a Gamblers Handout and Log Record available for the asking.
Thanks for reading. Bob