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The IRS wants its cut of your gambling winnings

If you're betting that Funny Cide will be the first horse across the Belmont Stakes finish line on June 7, you have lots of company.

With the gelding poised to become only the 12th Triple Crown winner, and the first in 25 years, interest in the race is running high. More than 100,000 race enthusiasts are expected to jam the Long Island, N.Y., track to personally cheer for the home-state favorite; Belmont Park has even enlarged its grandstands to accommodate more spectators. Millions more worldwide will watch the spectacle on television.

Many of these racing fans have more than just horse racing history on their minds. They've handed over a couple of dollars or more to bookmakers, legal and not-so-legal, hoping to cash in on a pony's performance. These wagers spotlight a persistent Internal Revenue Service problem: tracking and taxing gambling winnings.

It's a challenge the agency faces daily because many people don't realize that gambling winnings are taxable. Of those who do, a good portion simply choose to ignore the law.

America's real pastime
ambling has been around at least since man was able to record his activities. Dice almost identical to those used on today's gaming tables have been recovered from Egyptian tombs and Chinese excavations dating to 600 B.C.

In addition to the well-publicized offerings of Las Vegas and Atlantic City, betting is commonplace throughout the United States. The choices range from off-track betting parlors to charitable bingo games to riverboat casinos to state-operated lotteries.

Then there are the online gambling opportunities. A check of any Internet search engine will turn up thousands of gambling sites that are expected to generate $5 billion in 2003 for their operators, according to a General Accounting Office study.

These Web sites typically are foreign headquartered to avoid running afoul of U.S. and state laws against the practice. But thanks to the Internet's boundary-busting capability, you can place a bet by credit card or other electronic payment method. Some card issuers, however, now deny gambling-related transactions, citing risk factors if the cardholder disputes or refuses to pay the charges.

Couple all these gambling options with Americans' love of athletics, and betting on sporting events has arguably become the true national pastime.

States with gaming
Commercial casinos Colorado, Illinois, Indiana, Iowa, Louisiana, Michigan, Mississippi, Missouri, Nevada, New Jersey, South Dakota
Racetrack casinos Delaware, Iowa, Louisiana, New Mexico, Rhode Island, West Virginia
Tribal gaming (casinos, bingo, pulltabs, etc.) 29 states
Lotteries 40 states plus the District of Columbia
Pari-mutuel wagering 41 states
Charitable gaming 47 states plus the District of Columbia

So many events, so many bets
In the United States, legal betting on sports is allowed only in Nevada, and Las Vegas draws millions of visitors each year expressly for that purpose. Silver State casino operators report more than $2 billion is bet annually on athletic events, including racing (horse and auto) and professional and collegiate sports.

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The dollars add up because there are countless ways to get a piece of the action. Wagers aren't just placed on the eventual winner.

In football, you can bet on who will catch the first pass, who will rush for the most yardage (team and individual), who will get the first sack. In horse racing, wager on which steed will lead at each turn or halfway. If it happens in a game, the sports book operation will take a bet on it.

But casino bets aren't a real concern for the IRS. The tax man has a way to track Nevada's legal athletic wagering. However, those dollars, according to the American Gaming Association, represent less than one percent of all sports betting nationwide.

It's a dicier tax proposition when it comes to pursuing bets placed at increasingly popular offshore sports-betting operations, dollars dropped into friendly office pools and illegal wagers handled by bookies. In fact, the National Gambling Impact Study Commission estimates that illegal wagers run as much as $380 billion annually.

Why the bells go off
Legal betting operations -- state lotteries, casinos and horse racing tracks -- are regulated. One of the government agencies that has a say in these operations is the IRS.

When a patron hits the long-shot trifecta, picks the six lucky lotto numbers or lines up all the cherries on the slot machine, the establishment paying off the bet makes sure that it gets the gambler's personal details to pass along to the tax collector. "That's why the bells go off when you hit the slots," says John Shelk of the American Gaming Association. "So we can get someone there to get your tax information."

In some cases, Uncle Sam even gets his cut (27 percent in 2002, but recent tax law changes are likely to drop the bite to 25 percent) before you get your payout. That's the case for winnings of more than $5,000 from any sweepstakes, wagering pool or lottery.

Withholding also is collected on proceeds that are 300 times or more the the amount of the bet (for example, a $600 payoff of a $2 track bet). Gambling winnings from bingo, keno and the slots are not generally subject to withholding, but you're still required to provide your tax ID. If you refuse, the casino can assess backup withholding of your jackpot at a 30-percent rate

Come tax-filing time, you'll hear from the casino (or horse track or lottery agency) again. The payer will then send you -- and the IRS -- a Form W-2G showing how much you won and how much was withheld for federal taxes. But, Shelk notes, there's a distinction between what's reportable and what's taxable.

All gambling winnings -- regardless of the amount -- are taxable. But it's ultimately the winner's responsibility to let the IRS know how much was won, even if the casino doesn't have to file a W-2G. This reliance on the gambler's tax-law compliance is where the IRS frequently gets shortchanged.

How tempting is it to assume the IRS won't miss a small jackpot? Apparently pretty darn tempting.

"On a trip to Vegas, I won $146 at a slot machine," admits a chagrined economics professor at a church-financed university, "and I didn't report it on my tax return."

A bad day at the track can pay off
The professor's tax reporting inclination is one shared by many gaming winners, but not all.

IRS analysis of 2000 returns, the latest year for which data are complete, shows more than 1.4 million taxpayers reported gambling income of almost $17 billion. This includes winnings from casinos and horse tracks, lottery and raffle jackpots, as well as the fair market value of cars, houses and other noncash prizes.

As for how many taxpayers didn't bare all about their betting at tax time, the IRS won't even venture a guess. "We can't tell you what we don't know," says Don Roberts of IRS headquarters in Washington, D.C.

But the IRS has a tax break for conscientious taxpayers who report gambling income on line 21 of their Form 1040s. Tax law allows you to subtract any gambling losses from your winnings if you itemize. For many, that's a good deal. One million gamblers in 2000 made their good luck less taxing by claiming $10.6 billion in bad bets.

Losses to reduce gambling winnings don't have to be from the same game. If you go to the race track every weekend and drop $1,000 but then win $3,000 on the World Series, those losing horse-betting slips can reduce the amount of baseball winnings on which you'll be taxed.

There are a couple of ground rules to keep in mind here. First, you can't claim more in losses than you won. And, as with any tax deduction, you need to keep records of your losses that will satisfy the IRS if you're ever audited.

Good records are the best bet
Roberts recommends keeping track of gambling losses as you go through the year so you're not scrambling to reconstruct them if you do hit it big.

Such reconstruction efforts not only are difficult, they aren't likely to pass IRS scrutiny. Tax professionals recall a horse race fanatic who went to tax court with bags full of losing betting slips to support his large deduction against his winnings.

It didn't work; almost every ticket was covered with footsteps of the other bettors who tossed the tickets when their horses didn't win. He ended up paying the extra tax -- and penalties.

"It's not a tax myth, but it is an old story," Roberts said, who saw similar actions when he was an agent in Saratoga, N.Y.

"And if you don't have a big win to offset," he adds, "then the receipts can be your ticket to Gamblers Anonymous."

-- Updated: June 5, 2003

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See Also
How to handle sudden wealth
A prize produces a tax dispute
Don't overlook these miscellaneous (including gambling loss) deductions


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