Tax Issues With Gambling Winnings and Losses

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

TELLING TIPS: True or False:

a. Gambling winnings and losses are netted on the front page of the tax return.

b. Excess gambling losses can be carried over to next year.

c. I can use ‘Income Averaging’ to lower taxes.

d. Gambling winnings have no effect on the taxable portion of Social Security received.

Unlike investors, gamblers cannot reduce winnings by losses and report the difference on just one schedule or line of the tax return. Total winnings are reported on the form 1040 on the ‘other income’ line as ‘gambling income’ on the front of the tax return, and the related losses are reported on Schedule A, Miscellaneous Deductions, as ‘gambling losses’.

Losses, however, cannot be more than the winnings (Tell that to the casino!) If you cannot itemize, you do not get the deduction, but you still have to report the income (The standard deduction for a married couple filing jointly, both over 65, is $13,900. So if you win $10,000, you might be taxed on all you winnings with no offset on the tax return.)

What does winning mean to grandma? If she’s retired, up to 85 percent of her Social Security can become taxable, and the credit for qualified retirement savings could be eliminated. Although losses may be deductible, the medical deduction is reduced as it is based on amounts over 7.5 percent of adjusted gross income, which includes gambling winnings. Think about this before giving the casino grandma’s social security number.

If you have a non-cash winning, the tax is based on the fair market value of the item (Remember the Ophra tax issue). If the vehicle would’ve cost $35,000 at a dealer, that is the figure that will be used. Yes, many people end up selling their vehicle winnings to pay the tax. Hey, you still end up with (some) cash!

And if you win big, the IRS often has a representative in the larger gaming institutions to “congratulate” you on the success (And who was the real winner at the World Series of Poker? In 2008, the amount won at the final table was $32,731,625; the total taxes, Federal and States, were $14,310,688, or 43.7 percent.)

But there is some good news. If you do itemize your deductions, the gambling losses are not subject to the nondeductible floor of two percent of your adjusted gross income as are other expenses, such as job-hunting costs, unreimbursed business expenses, union dues, etc.

Gambling winnings may be offset from all kinds of waging — legal or illegal. If you win at slots, you may use losses from lottery tickets, horse races, or school raffles. Also, if you file a joint return, losses of one may offset winnings of the other. Note that at the State level, your losses may not be deductible at all. This includes New York, New Jersey, and Hawaii.

PROOF OF LOSS — Bring In The Slot Machine?

Just as the business person needs to keep a diary of the ‘unreimbursed expenses’, so a gambler needs to keep a diary as well. The IRS has provided some guidelines: date and type of wager, location of the establishment, other people present, amounts won and lost, betting tickets, proof you were there: hotel bills, airline tickets, gasoline credit-card receipts, bank deposits and withdrawals; list of horse and dog track races, entries, wagers, unredeemed tickets; lottery losing tickets. One more thing — are you a ‘preferred customer’ of the casino, and do you receive ‘comps’? Comps are considered gains, and your losses are deductible against them.

If at the casino, call each casino in which you have gambled and have a player’s card. The casinos log the amount of money you “deposit” into their slot machines through that player’s card you insert into the machine to garner points. Ask for a printout of your “deposits.” That will be your proof, in the event of an IRS audit, that you are really in the hole in case, and that you shouldn’t have to pay income on the gambling winnings because you have more gambling losses.

No ‘player’s card’? Get one. Or, write down in a logbook the amount of the loss, the time, and at what game. If you don’t have proof, you don’t have a deduction.

Are You A New Yorker?

As noted above, the IRS allows you to deduct the losses as an itemized entry on Schedule A of your 1040. New York also does, but with a catch.

Problem: Roy L. Flush won $500,000 and lost $450,000. He now needs to prepare his tax return, and finds he owes an additional $2,600 to Uncle Sam, but his NY State tax increases by $27,000!

The rule is that you will lose 50 percent of your itemized deductions on your New York State tax return if your Adjusted Gross Income (AGI) exceeds $500,000 (There is a phase-out between $100,000 and $500,000). The States a gambler does not want to live in are: Connecticut, Hawaii, Illinois, Indiana, Massachusetts, Michigan, Mississippi (Only MS gambling deductions are allowed), New Jersey, New York, Ohio, West Virginia, and Wisconsin.

Tax issues are rarely simple.

And by the way, all the above questions are False.

Tax tip: If you do spend time in the casino, here’s a novel idea: One taxpayer suggested that the time in the casino is one act, and therefore winnings and losses should be netted. Here is a court case that you might discuss with your preparer. See page 9.

Have a good week.

And remember: Most of us have enough money to pay our taxes. What we need is something to live on!

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.