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Bankrate's 2009 Tax Guide
Tips & tools
A tax tip a day plus an array of tax tools, terms and training will help you through filing and beyond.
IRS gambling challenge
Gambling winnings are taxable income
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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
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