For a gambler, the only thing worse than a string of losses at the casino is having to report any winnings they have earned with the Internal Revenue Service on Tax Day.
Here is a guide for determining what winnings you have to report and how to report them. We will also examine how to claim some of your losses so that you can lower your tax burden.
What You Have To Report
According to the IRS, even the casual gambler is required to report income earned from the following activities:
- horse races
- cash winnings
- prizes such as cars and trips (using the fair market value)
Note that this list is not exhaustive. The bottom line is that your winnings from any gaming activity are expected to be reported to the IRS. This also includes winnings earned at Indian reservations and sources outside the U.S. such as winnings from online gambling sites.
It also includes any money that is earned through illegal activities such as dog racing (which is illegal in some states) and office pools. When it comes to taxes, "Uncle Sam isn't a cop," writes Texas journalist Kay Bell on her blog, Don't Mess With Taxes. "He doesn't worry about how you get your money. He is only concerned about getting his cut."
How To Report Gambling Income
All gambling winnings should be reported on the standard Form 1040 that most taxpayers fill out at tax time. According to Tax.com, the following types of winners are supposed to be given an additional Form W-2G when they hit the jackpot in order to report their earnings immediately. In some case, winners must pay an estimated tax of 25 percent right off the top.
This includes those who earned:
- $1,200 or more in gambling winnings from bingo or slot machines;
- $1,500 or more in proceeds (the amount of winnings minus the amount of the wager) from keno;
- More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament;
- $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments) and the payout is at least 300 times the amount of the wager; or
- Any other gambling winnings subject to federal income tax withholding.
The IRS advises that gamblers keep written records of all of their winnings and losses in case of an investigation or audit.
How do you keep track? According to Bankrate, "Acceptable gambling-loss record keeping includes a written log detailing the date of your wagers, the location, the amount of the bet, type of gaming and wins and losses. You should also hang on to losing lottery tickets or bingo cards."
How To Report Losses
The IRS will ensure that you pay your portion of taxes on any earnings. However, there is some tax relief for your losses. According to the IRS, you can deduct your gambling losses. However, you can only deduct your losses if you itemize your deductions. If you take a standard deduction, you're out of luck. Gambling losses are reported on Form 1040, Schedule A, as a miscellaneous itemized deduction.
Additionally, "the amount of losses you deduct may not be more than the amount of gambling income reported on your return," according to the IRS's explanation of Gamling Income and Losses. In other words, you can only deduct up to the amount that you won; if you only lost money all year long, the IRS is not going to take pity on you.
"To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses."
A Note About Professional Gamblers
There is a separate set of tax rules for individuals who are considered professional gamblers. "The bottom line is that you must devote substantial time to gambling on a regular basis, and you must depend on gambling winnings as a meaningful source of income," reported SmartMoney.
Professional gamblers report gross winnings just like business owners report profit or loss from a business on Schedule C of Form 1040. The downside of this is that these professional gamblers will be subject to a self-employment tax, which can pack a wallop at tax time.
The bottom line is that you must report all gambling earnings to the IRS. However, the fact of the matter is that many casual gamblers choose not to report their winnings. This is not a wise decision given that severe tax (and possibly legal) ramifications that could result if the IRS finds out about this omission. Therefore, it’s always a safe bet to disclose your winnings. Keep this advice in mind the next time you win big at the casino.