6 Tips on Gambling and Income Taxes: Don't Play the IRS for a Sucker

Each year we have clients that have received a tax document from a casino documenting their gambling winnings. They always state that they have lost far more than they have won, but the following article highlights the scrutiny this area is under from the IRS.

6 Tips on Gambling and Income Taxes: Don't Play the IRS for a Sucker

By Ken Berry, JD - CPA Practice Advisor Tax Correspondent On Jan 23, 2015

Do you have clients who enjoy wagering? It can be anything from buying daily lottery tickets to playing blackjack at a casino to betting at the racetrack. Naturally, if a client is lucky enough to pocket some loot, the IRS will make sure it receives its fair share in taxes. Silver lining: At least the client can use losers sustained in the same tax year to offset the winners.

In other words, gambling losses aren’t completely tax-deductible on their own, but you can write off losses up to the amount of your winnings. Those winnings are taxed at ordinary income rates reaching as high as 39.6% on the federal level.

But you can’t just deduct the amounts that you say you lost on your return. The IRS is a stickler for requiring adequate records to substantiate losses and this is a frequent audit item. Practically speaking, you should advise clients – especially those who are heavy gamblers – to keep a log of their activities stating the date of the activity, the location, names of any people who were there with you, the amounts wagered, the type of gambling and your winnings and losses. Supplement this log with receipts, tickets, statements and forms and the like.

The specific proof required by the IRS may vary according to the type of gambling activity. For instance:

• Bingo and similar games: Keep records of the number of games played, the cost of cards purchased, and amounts collected on winning cards.
• Slot machines: Maintain a record of the machine number and all winnings by date and time the machine was played.
• Casino table games (e.g., blackjack, craps, poker and roulette): Write down the number of the table where you played and any casino credit information.
• Racing (horses, harness, dog, etc.): Keep track of the number of races, the amounts of your wagers and the amounts you won and lost.

Reminder: Don’t try to play the IRS for a sucker. For example, if you finally hit the jackpot at the racetrack and offset the income with hundreds of tickets for small wagers the same day, an examiner will suspect that you simply scooped up losing ticket stubs off the ground. Losses should be realistic under the circumstances.

In addition, the IRS offers these tips:

1. As noted above, gambling income can include a variety of types, as well as the fair market value of prizes a person may win, such as cars or trips.
2. The taxpayer may, or may not, receive a Form W2-G.
3. With or without that form, winnings should be reported as income for tax purposes.
4. Winnings should be entered on the "Other Income" line of a federal tax return or tax software.
5. Gambling losses can be deducted against the total amount of winnings, but not over.
6. And, of course, keep accurate records.

Finally, be aware of this one “tax edge” for bettors: Gambling losses must be deducted as miscellaneous expenses on Schedule A, but they’re not subject to the usual floor of 2 percent of adjusted gross income (AGI). Thus, the losses are deductible, up to the amount of winnings, regardless of your client’s AGI or the amount of other miscellaneous expenses. You can take that to the bank.

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Leave It to the Pros

There’s another way around the gambling loss restrictions for a select few taxpayers. If gambling legitimately is your livelihood, you may report winnings and losses from such activities on Schedule C, but you can’t claim an overall loss. In addition, the value of complimentary rooms, vacations, and other gifts from casinos is treated as taxable income, but can be offset by losses from your gambling activities.

Of course, it’s not easy to establish yourself as a professional gambler. Be prepared for an argument from the IRS. And the agency usually prevails in court, so be wary of the odds against you.