Gambling winnings are taxable income
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 appealing.
"On a trip to Vegas, I won $146 at
a slot machine," says a chagrined economics professor
at a church-financed university, "and I didn't
report it on my tax return."
Making a bad day
at the track pay off
The professor's tax reporting inclination is one shared
by many gaming winners, but not all.
IRS analysis of 2006 returns, the latest year for which data are complete, shows almost 1.9 million taxpayers reported almost $28 billion in gambling income. This includes winnings from casinos, horse tracks and 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 an IRS spokesman.
But the IRS has a tax break for conscientious taxpayers who report their gambling income on line 21 of their Form 1040. They can subtract any gambling losses from winnings if they itemize. For many, that's a good deal. That same 2006 data shows that more than 1 million gamblers that tax year made their good luck less taxing by claiming slightly more than $19 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 owe tax.
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
Retired IRS agent Don 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," says Roberts, who
saw similar actions when he
worked for the tax office
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: April 3, 2009