Losses may offset annual winnings
Do you enjoy the thrill of gambling? Whether you end up winning or losing, it is important to understand the main tax rules related to your gambling activities. Otherwise, you may end up owing considerably more tax than you normally would have to pay.
Background: On the federal level, gambling winnings constitute taxable income. It does not matter how and where you win—it could be at a church raffle or the racetrack or a casino aboard a cruise ship. In any case, you owe tax on the income to the federal government. Depending on the type and amount of your winnings, the payer might provide you with a Form W-2G and may withhold federal income tax from the payment.
On the other side of the coin, gambling losses are deductible on your federal tax return, but only up to the amount of your winnings. For example, if you win $10,000 in a lottery this year and then lose $12,000 at the blackjack and craps tables in Las Vegas, your deduction is limited to $10,000. Conversely, if you lose $7,500, the entire loss is deductible, resulting in tax on $2,500 of gambling income.
Although gambling losses are deducted as miscellaneous expenses, at least you avoid a special tax law floor. Generally, miscellaneous expenses are deductible only to the extent that your annual total from all sources exceeds 2% of your adjusted gross income (AGI). But the 2%-of-AGI limit does not apply to gambling losses.
As you might imagine, taxpayers may try to play fast and loose with these rules, so the IRS stays on its toes. You must keep records to back up your claims in case the IRS challenges gambling loss deductions. If you do not have the proper records, you may be leaving tax money on the table.
What sort of records do you have to keep? This can vary according to the gambling activity, as shown below:
- Bingo: A record of the number of games played, cost of cards purchased and amounts collected on winning cards.
- Keno: Copies of the keno tickets that were validated by the gambling establishment, copies of the casino credit reports and copies of the casino check-cashing records.
- Racing (e.g., horse, harness and dog): Records of the number of races, amounts of wagers and amounts won.
- Slot machines: A record of the machine number and all winnings by date and time the machine was played.
- Table games (e.g., blackjack, craps and roulette): The number of the table where you played and casino credit card data indicating where credit was issued.
Note that these records may be supported by other means (e.g., unredeemed ticket stubs from the racetrack). However, the supporting records must be legitimate.
Finally, special rules apply to those who gamble professionally. Among other requirements, you must be engaged in the activity with the intention of turning a profit. If you qualify, the activity is generally treated like a business, so you may be able to deduct an annual loss. Seek guidance from your professional tax adviser.