Those poker tourney winnings, along with your jackpots from the casino or horse track or lottery dealer, will be recorded on a Form W-2G showing how much you won and how much, if any, was withheld for federal taxes. And like all other income reporting forms, a copy will go to the IRS.
But 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 appealing.
"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."
Making a bad day at the track pay offThe professor's tax reporting inclination is one shared by many gaming winners, but not all.
IRS analysis of 2007 returns, the latest year for which data are complete, shows more than 1.6 million taxpayers reported almost $27 billion in gambling income. 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 an IRS representative.
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 2007 data shows that more than 987,000 gamblers that tax year made their good luck less taxing by claiming almost $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 betKeeping track of gambling losses as you go through the year is the best bet. That way you won't have to scramble to reconstruct them if you do hit it big.
Such reconstruction efforts not only are difficult, they also 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 one retired IRS agent 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, then the receipts can be your ticket to Gamblers Anonymous."
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