For anyone who takes a spin at roulette, buys a lottery ticket, or engages in other wagering activities, it’s important to be familiar with the applicable tax rules. Otherwise, you could be putting yourself at risk for interest or penalties — or missing out on tax-saving opportunities.
You must report 100% of your wagering winnings as taxable income. The value of extraordinary complimentary items (“comps”), such as autos and jewelry, provided by gambling establishments must also be included in taxable income because comps are considered gambling winnings. The IRS has reserved its opinion on whether you can exclude “normal comps,” such as food, drink, lodging, and entertainment, from taxable income. Winnings are subject to your regular federal income tax rate, which may be as high as 39.6%.
Gambling establishments may be required to report your winnings to you on IRS Form W-2G (“Certain Gambling Winnings”). In some cases, they may withhold federal income tax. You should be aware that anytime a Form W-2G is issued, the IRS gets a copy. So, if you’ve received such a form, keep in mind that the IRS will expect to see the winnings on your tax return.
You can write off wagering losses as an itemized deduction. However, allowable wagering losses are limited to your winnings for the year, and any excess losses cannot be carried over to future years. If you do not itemize, or your itemized deductions are limited based on the income limitations for high income taxpayers, you may receive a reduced benefit of your losses or no benefit at all. Therefore, if you win $100 one day and lose $100 another, it is possible to still pay tax on your gambling income, despite not having any net gambling winnings. Also, out-of-pocket expenses for transportation, meals, lodging, and so forth don’t count as gambling losses and, therefore, can’t be deducted. Also, you should be aware that different states tax gambling income differently.
To claim a deduction for wagering losses, you must adequately document them, including:
- The date and type of specific wager or wagering activity.
- The name and address or location of the gambling establishment.
- The names of other persons (if any) present with you at the gambling establishment. (Obviously, this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor.)
- The amount won or lost.
The IRS allows you to document income and losses from wagering on table games by recording the number of the table that you played and keeping statements showing casino credit that was issued to you. For lotteries, your wins and losses can be documented by winning statements and unredeemed tickets.
If you qualify as a “professional” gambler, some of the rules are a little different.
If you have questions about gambling wins, losses, or documentation, contact me at meagan@BerdonLLP.com or contact to your Berdon advisor.
Michael Eagan, J.D., LL.M., a Berdon LLP tax manager, has nearly 20 years of experience in the accounting profession with a concentration in the real estate industry including partnerships and international organizations. He works extensively with REITs to minimize corporate taxes and maximize tax benefits.