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Lady Luck must be Uncle Sam's cousin,
because taxes must be paid on all gambling winnings.
Here's a look at the federal tax
forms you'll need to share your good fortune with the
Internal Revenue Service. And if you lost a few rounds
before your numbers came up, there's a way you can turn
those losses to your tax advantage.
Winning
amounts matter
Requirements for reporting and withholding from a winning
bet depend on the type of gambling, the amount won and
the ratio of the winnings to the wager. When you pocket
$600 or more (and that amount is 300 times your bet)
at a horse track, win $1,200 at a slot machine or bingo
game, or take $1,500-plus in keno winnings, the payer
must get your Social Security number and let the IRS
know that you came into the extra income.
And if you're lucky enough to rake
in $5,000 or more on a gambling transaction, you're
probably not going to walk away with all the cash you
won.
In addition to telling Uncle Sam
that you were a winner and how much, the payer in these
situations generally will reduce your payout by withholding
federal taxes at the 25-percent rate. If you try to
shortchange the IRS by refusing to furnish your Social
Security number, the payer could take as much as 28
percent of your winnings right off the top to send to
the tax collector.
In either instance, you'll get a
Form
W-2G showing the amount you won and, if applicable,
how much in taxes you paid on it upfront.
When
you have to report it
Even if you didn't win enough to trigger W-2G filing,
you do want to be a diligent taxpayer and report those
gambling winnings, right? The casino, track or lottery
agent might not have reported that $25 you won, but
it's still taxable income. It's ultimately the taxpayer's
responsibility to tell Uncle Sam about his good fortune.
You report your winnings -- from the W-2G
or those smaller jackpots -- on line 21, Other Income,
of Form
1040. In addition to gambling proceeds, this is
where you'd report any prizes or awards (cash or the
cash value of merchandise) you won. All this money goes
toward your total income amount.
However, you don't have to pay taxes
on all your earnings, regardless of how you got them.
You can reduce the amount of money the IRS will tax
by reporting your losses as part of your overall itemized
deductions. Check out line 27, Other Miscellaneous Deductions,
on Schedule
A. That's where you report any gambling losses.
You can claim up to the total amount of winnings you
entered on your 1040, effectively wiping out any taxable
gambling income.
But make sure that this deduction,
along with your other itemizations, is more
than the standard amount. You always want to use
the method that will provide you a bigger deduction.
Even though technically you might
be able to avoid taxes on $3,000 you won by claiming
$3,000 in bad bets, that's still less than the standard
deduction of $5,150 allowed a single taxpayer on 2006 returns. If you
have no other deductions to itemize, it doesn't make
sense to forfeit the standard deduction's other $2,150
just because you can claim gambling losses. If, however,
your wagering losses are large enough to help boost
your already substantial itemized deductions, then fill
out the Schedule A.
Keep track of your gaming losses
When you do claim your gambling losses on your tax return,
it's a good idea to keep a record of them. While you
don't have to send your loss data in with your return,
documentation could come in handy if the IRS ever questions
the claim.
Acceptable gambling-loss recordkeeping
could include a written log detailing the date of your
wagers, the location, amount bet, type of gaming, and
wins and losses. You should also hang on to losing lottery
tickets or bingo cards.
The good thing about deducting gambling
losses is that, unlike some other deductions, you don't
have to meet a certain level before you can claim them.
But then again, they aren't completely unlimited.
You can only count as much in losses
as you won. So if you spent $100 on lottery tickets
and won $75, you can only deduct $75. The other $25
is just part of the price of playing the game.
Freelance writer Kay Bell writes Bankrate's
tax stories from her home in Austin, Texas, and blogs
each day on tax topics at Don't
Mess with Taxes.
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