A good time comes in all ways, but it’s always better when the fun-to-cost ratio is low. Even better, the ratio is inverted and you go home with more money than when you left, which can be allure of gambling to many people. Just remember that particular good time is considered income by our federal government.
Let’s face it: the government spends a lot of money no matter who is running the show and will look for ways to bankroll their expenditures through a meticulous tax code. This tax code categorizes income in a few different ways and thus insist that all income be included when filing your taxes. One of the sources of income that should be included is winnings one takes home from gambling. We’re not just talking casino loot here. Anything that is considered or called “cash or prizes,” lotteries, raffles, horse races are all considered income based on our tax code, and that’s not all.
Winnings are easy to document when you win a large prize, but what are the thresholds for filing when winnings only return small amounts. The IRS makes gambling establishments provide a Form W-2G in the following scenarios:
1.The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot machine
2.The winnings (reduced by the wager) are $1,500 or more from a keno game
3.The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker
4.The winnings (except from those listed above) are $600 or more and at least 300 times the amount of the wager
5.The winnings are subject to federal income tax withholding
For example, if you were to buy a scratch-off for two dollars at the supermarket and won five dollars on the card, the supermarket is not going to give you a Form W-2G. If you went to a casino, however, and won $1,700 playing the slot machines, you would receive a Form W-2G from the casino. Additionally, there are times when you can receive a prize other than cash by gambling. If you receive a non-cash prize, you will report the prize at fair market value.
Claiming gambling winnings is a straightforward process, the issue is the many taxpayers don’t realize that they are required to report these winnings. Usually, when the amount won is small, taxpayers do not report these on their return even though they should. It is important to report all gambling winnings on a tax return regardless of their size. Many do not keep appropriate records of their winnings, which also makes it more difficult to track and claim the income especially when the winnings come in small amounts, multiple times throughout the year.
Record keeping is crucial if you are to take advantage of being able to deduct your gambling losses. Be careful. The tax code is strict in the ability to claim gambling losses. By claiming these losses you are increasing your chances of an audit because the IRS knows that people usually do not keep adequate records of their winnings and losses. To have adequate records, the taxpayer should have the following information for all gambling activities, usually kept in a journal, spreadsheet, or in a gambling log book:
1) the date of the winnings or loss,
2) name and address of the gambling establishment,
3) type of wagers you made
4) amounts won or lost, and
5) names of other people with you during the session.
It is also beneficial if you can prove you were at the establishment. For a casino this could be a parking receipt, hotel reservation, or a receipt from a vendor or restaurant on-site. Throughout the year, people who gamble should maintain copies of all Form W-2Gs, Form 5754, wagering tickets, credit reports showing advances to or from gambling establishments, ATM receipts used for gambling, and/or any statements of actual winning or payment slips given to you from a gambling establishment.
Deducting Gambling Losses
Taxpayers are allowed to offset their winnings with their losses on their tax return, assuming they have adequate record keeping to prove them. Taxpayers are not allowed to deduct their excess losses. That means that if an individual has $10,000 in winnings in a year and $15,000 in losses, they can only deduct the $10,000 that offsets their amount won. The excess gambling losses are lost and do not carry over to help offset winnings from prior or future years. It is important to note that gambling losses are deducted on line 28 of Schedule A as another miscellaneous deduction that is not subject to a 2% floor. Since the deduction is reported on Schedule A, the taxpayer would have to itemize to be able to see the tax benefits of the gambling losses deduction.
Overall the amount of returns that have either gambling winnings or losses on them are relatively small, and when a return does have this information it is more likely to be audited. There are extensive requirements to keep adequate records to defend yourself in the face of an IRS audit and most taxpayers are not successful at doing this. As a casual gambler, please be aware of what you are getting into when you gamble big or small. Professionals should call us for further consultation! Have fun, be safe, and be aware of your tax obligation!