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Many people wonder how gambling activities are treated
for tax purposes. Taxpayers often run into tax
difficulties in this area. This is because gambling
winnings are fully taxable, while gambling losses
aren't simply offset against the winnings. Briefly,
your winnings must be reported on "other
income" line 21 on the front page of your tax
return. To measure your winnings on a particular
wager, just use the net gain on the wager. For
example, if a $20 bet at the race track turns into a
$100 win, you have won just $80, not $100. If you lose
$50 on a different race, however, you cannot simply
offset this amount against your $80 win.
You must separately keep track of losses. They are
deductible, but only as itemized deductions (on line
27 of Schedule A of your form 1040). Thus, if you take
the standard deduction (i.e., don't itemize), you
cannot deduct your gambling losses. On the other hand,
if you do itemize, the gambling losses fall into the
category of "Other miscellaneous
deductions." These are fully deductible as
itemized deductions and aren't subject to either the
2% of adjusted gross income (AGI) "floor,"
or the 3%/80% phase out of certain itemized
deductions. (Some types of miscellaneous itemized
deductions, such as investment expenses and
unreimbursed employee expenses are only deductible to
the extent they exceed, in total, 2% of AGI. And if a
taxpayer's AGI exceeds a specified dollar amount,
certain itemized deductions are reduced by the lesser
of 3% of the excess of AGI over that dollar amount, or
80% of the otherwise allowable itemized deductions.) A
second important limitation is that your gambling
losses are only deductible up to the amount of your
gambling winnings. That is, for tax purposes, you can
use your losses to "wipe out" your gambling
income but you can never show a gambling tax loss.
Be careful to keep good records of your losses during
the year. Keep a diary in which you indicate the date,
place, amount and type of loss as well as the names of
any people who were with you. Save all documentation,
such as losing tickets, checks or credit slips. You
should also save any related "side"
documentation, for example, if you have losses on a
trip to Las Vegas, save the hotel bill and plane
ticket, any receipts from cash machines in the casino,
as well as your records on the gambling losses
themselves. If you join a slot club, ask the casino if
you can get a printout of the amount you bet. Since
anyone can just pick up, e.g., an unlimited amount of
losing tickets at a race track, the IRS may require
more data and documentation to substantiate gambling
loss deductions.
James W. Crawford, CPA |
