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Any one of us may be tempted to take a little chance at the lottery or the casino every now and then, so long as it doesn’t become an addiction. Although the odds of getting the big win are slight, to say the least, some people do win smaller amounts as amateur gamblers.
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The question arising at this point is what are the tax implications for the gambling income.
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Like most income, gambling winnings have to be reported on your tax return.
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Gambling Income includes, but is not limited to, winnings from the lottery, horse racing and casinos. It also includes cash and non-cash prizes (for instance, you must report the fair market value of non-cash prizes like cars and trips.)
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If you win, the payer may give you a Form W-2G, Certain Gambling Winnings and send a copy of the W-2G to the IRS. The payer must issue the form based on the type of gambling, the amount you win and other factors. You’ll also get a form W-2G if the payer must withhold income tax from what you win.
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Gambling winnings are reported on Form W-2G if:
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- The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot machine,
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- The winnings (reduced by the wager) are $1,500 or more from a keno game,
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- The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker tournament,
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- The winnings (except winnings from bingo, slot machines, keno, and poker tournaments) reduced, at the option of the payer, by the wager are:
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a.
$600 or more, and
b.
At least 300 times the amount of the wager, or
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- The winnings are subject to federal income tax withholding (either regular gambling withholding or backup withholding).
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You normally report your winnings for the year on your tax return as “Other Income” on line 21 of your 1040 Form. You must report all your gambling winnings as income, even if you don’t get a Form W-2G. In addition, you may be required to pay an estimated tax on your gambling winnings.
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Your gambling winnings may be subject to a standard 25% tax if they total more than $5,000, minus the value of any original wager (depending on the game) and your gambling losses.
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| If you win a non-cash prize, such as a car or a trip, you will be responsible for the taxes on the fair market value of the item or items (if the value exceeds $5,000). |
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| It is important to remember that you can deduct your gambling losses on Schedule A, Itemized Deductions. The total you can deduct, however, is limited to the amount of the gambling income you report on your return. |
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| This limitation applies to the combined results from any and all types of gambling (playing the lottery, slots, poker, the horses, and all the rest.) |
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After applying the losses-cannot-exceed-winnings limitation, the allowable gambling loss deduction for a person who is not a professional gambler is claimed on Line 28 of Schedule A (Itemized Deductions). If you don't itemize, you do not get a write-off. Also, an amateur gambler cannot deduct any out-of-pocket expenses related to gambling (such as transportation costs, meals, and lodging).
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| Since we’ve mentioned the terms amateur and professional gamblers, let us see in a nutshell more precisely who a professional gambler is. |
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| To be considered a professional gambler you must devote substantial time to gambling on a regular basis and you must depend on gambling winnings as a meaningful source of income. |
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It also helps if you conduct your gambling activities in a business-like fashion by keeping detailed records of wins and losses and developing and evaluating strategies.
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Professional gamblers report their gross winnings as income on Line 1 of Schedule C of Form 1040 (Profit or Loss from Business) and their losses (up to the amount of the winnings) and allowable out-of-pocket expenses (for transportation, 50% of out-of-town meal costs, lodging, and so forth) as business expenses on Schedule C. A professional gambler's allowable out-of-pocket expenses can be deducted in full on Schedule C without regard to the amount of winnings.
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But, whether an amateur or professional gambler, you must document the amount of your losses in order to claim your rightful gambling loss deductions. According to the IRS, taxpayers must compile the following information in a log or similar record:
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- The date and type of each wager or wagering activity;
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- The name and location of the gambling establishment;
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- The names of other persons (if any) present with you at the gambling establishment (obviously this requirement cannot be met at a public venue such as a casino or race track);
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| Be sure to keep detailed records of your gambling winnings and losses, and any related receipts, tickets, statements, or other paperwork. You must be able to prove both your winnings and losses if you wish to deduct your losses. |
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Obviously, help from a tax professional is always your best option in all your dealings with the IRS.
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