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Writing off huge gambling losses

George SaenzDear Tax Talk,
I have a win-loss statement from the casino I gamble in. It showed that I won $805,000 but the total losses were $69,000, which means I lost the $805,000 plus $69,000. I live in New York. How will that affect my income taxes? I only make $70,000 a year.
-- Kathy

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Dear Kathy,
If I understand you correctly, you made $805,000 in gambling wages, but the casino is telling you that you lost $69,000, which is almost all that you make from your day job.

While it's true that the casino always ends up winning, that statement alone is not enough to get you off the hook on the $805,000 that you won. I have seen casinos issue letters to clients that state that a typical gambler at your level of play won so much and probably lost so much, but this is based on statistical analysis and always based on the premise that in the long run the house wins, which is why they are in business.

Unfortunately, this letter alone will not be sufficient to prove that you actually lost $69,000, which again is nearly all that you make. The IRS would obviously question how you lived on $1,000. Your spending habits would probably render this statement untrue.

In order to prove out your losses, you need to have kept better records. Obviously, you already know your winnings based on the W-2Gs that you received, but don't forget to include those winnings that were not reported on the W-2G. To prove out your losses, the IRS recommends you keep a diary of your gambling activities, which is probably the furthest thing from your mind when you're winning. The IRS also states that:

In addition to your diary, you should also have other documentation. You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings, Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment.

Assuming you have some records to prove out your losses, you need to report your gambling winnings on Line 21 of your Form 1040 as other income. Your losses are an itemized deduction on line 27 of Schedule A, not subject to reduction by 2 percent of your adjusted gross income that applies to other miscellaneous itemized deductions.

Your taxes are affected by the inclusion of the winnings above the line and their deduction below the line in a number of ways. First off, your itemized deductions are reduced by 3 percent when your adjusted gross income goes above a certain threshold, depending on your filing status. While this does not apply to your gambling losses, it does apply to your other itemized deductions.

In addition, you lose your personal exemptions and certain credits. If you have Social Security benefits, they could become taxable. You might not be able to claim some adjustments to arrive at your adjusted gross income, such as an IRA or tuition expenses, and also they probably affect your New York tax bill. But of course then these things may not be so important when you've won $800,000 and are holed up in a gorgeous, comped Atlantic City suite.

-- Posted: April 1, 2005





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