Raking in Tax Breaks from Gambling - Losses are deductible against winnings

Do you like to gamble for entertainment? If the answer is “yes,” it is important to understand all the tax rules related to gambling wins and losses. Otherwise, you may end up paying considerably more taxes than necessary.

Basic Premise: Gambling winnings constitute taxable income on the federal level. 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 to Uncle Sam on the income. Depending on the type and amount of your winnings, the payer may 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 $8,000, the entire $8,000 is deductible, resulting in tax on $2,000 of gambling income.

Although gambling losses are deducted as miscellaneous expenses, you at least avoid a special tax-law floor. Generally, miscellaneous expenses are deductible only to the extent your annual total from all sources exceeds 2% of your adjusted gross income (AGI). However, the 2%-of-AGI limit does not apply to gambling losses.

As you might imagine, taxpayers may try to play fast and loose with the rules for gambling losses, so the IRS stays on its toes. You must keep adequate 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 must you 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 validated by the gambling establishment, copies of the casino credit reports and copies of the casino check-cashing records.
• Racing (horse, harness, dog, etc.): Records of the number of races, amounts of wagers and amounts won and lost.
• Slot machines: A record of the machine number and all the 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, be aware that special rules apply to those who gamble professionally for a living. 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.