Article Highlights:

  • Reporting Earnings
  • Deducting Losses
  • Documenting Losses
  • Online Gambling
  • Other Side Effects of Gambling

Gambling is a recreational activity for many taxpayers, and as one might expect, the government gets a cut if you win. In fact, there are far more issues related to gambling than you might imagine, and they may be impacting your taxes more than you know. So here is a rundown on the many issues that can affect you. Gambling takes many forms – horse racing, lotto tickets and scratchers, casino games, etc. – but they are all subject to taxation rules.

Reporting Winnings – Many individuals believe that they only have to report the winnings for which they receive a Form W2-G. Unfortunately, the IRS has a different viewpoint. Although you may be able to offset your reported gains with gambling losses, the IRS anticipates that you will also have had gambling winnings that were under the W2-G reporting threshold and will raise this issue during an audit.

Gambling Losses – The good news is that you can deduct gambling losses if you itemize your deductions, but only to the extent of your gambling income. In other words, you can’t have a net gambling loss on your tax return. Bad news: if you don’t itemize your deductions, you will have to pay taxes on the entire winnings even if you have a net gambling loss, as is the case for most individuals.

Documenting Losses – The next logical question is: how are you going to document your gambling losses if audited? Don’t rush down to the track and start collecting discarded tickets, since they generally aren’t acceptable documentation because of their ready availability. The IRS has published guidelines on acceptable documentation to verify losses. They indicate that an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, this diary should contain at least the following information:

(1) The date and the type of specific wager or wagering activity,
(2) The name of the gambling establishment,
(3) The address or location of the gambling establishment,
(4) The names of other persons (if any) present with taxpayer at the gambling establishment, and
(5) The amounts won or lost.

Save all available documentation, including items such as losing lottery and keno tickets, checks, and casino credit slips. You should also save any related documentation such as hotel bills, plane tickets, entry tickets, and other items that would document your presence at a gambling location. If you are a member of a slot club, the casino may be able to provide a record of your electronic play. You might also obtain affidavits from responsible gambling officials at the gambling facility. With regard to specific wagering transactions, your winnings and losses might be further supported by:

  • Keno – Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment.
  • Slot Machines – A record of all winnings by date and time that each machine was played.
  • Table Games – The number of the table at which the taxpayer was playing as well as casino credit card data indicating whether credit was issued in the pit or at the cashier’s cage.
  • Bingo – A record of the number of games played, the cost of tickets purchased, and the amounts collected on winning tickets.
  • Racing – A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.
  • Lotteries – A record of ticket purchase dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winning statements.

Online Gambling – If you gamble online, there is a good chance that the account is with a casino operating out of a foreign country. In this case, you should be aware that all U.S. citizens and resident aliens with a financial interest in or signature authority over foreign accounts with an aggregate balance of over $10,000 any time during the prior calendar year must complete FinCEN Form 114 online reporting those accounts to the Treasury by April 15th of the subsequent year or face draconian penalties (a six-month extension is available).

Other Tax Side Effects of Gambling – Because gambling income is reported in full as income and the losses are an itemized deduction, gambling winnings increase a taxpayer’s adjusted gross income (AGI) for the year. An individual’s AGI is used to limit other tax benefits, and having gambling income can have an adverse impact on your taxes. For instance, when you itemize your deductions, your medical expenses are currently reduced by 10% of your AGI. If you are receiving Social Security benefits, those benefits can become more taxable when gambling winnings are included in your AGI. The same applies to the cost of your Medicare insurance premiums, which are based on your AGI from two years prior.

Another very noticeable side effect is the cost of a family’s health insurance through a government marketplace. Under the Affordable Care Act, lower-income individuals receive a tax credit that reduces the cost of their insurance. However, their AGI is used to determine the amount of their credit – the higher their income, the lower the credit, and the lower the credit, the higher their insurance premiums.

If you generally claim the dependent exemption for a qualified relative – say, your mother – and Mom happens to hit a jackpot at the local casino, you may end up being unable to claim her exemption for the year of the winnings if the gambling winnings pushed Mom’s income over the annual gross income limit for claiming her exemption, which for 2017 is $4,050.

If you have questions about how these issues will affect your specific tax situation, please give this office a call.

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