Most recreational gamblers don’t need to worry much about taxes. They usually lose more than they win during the year and rarely win enough at any one time for the IRS to find out about it. However, if you gamble and had a big, big win last year, you could be headed for tax trouble. This is because the casino or other gambling establishment may have told the IRS how much you won. Unfortunately for gamblers, casinos, race tracks, state lotteries, bingo halls and other gambling establishments located in the United States are required to tell the IRS if you win more than a specified (relatively large) dollar amount on any single bet or play. They do this by filing a tax form called Form W2-G with the IRS. You’re given a copy of the form as well.
When a W2-G must be filed depends on the type of game you play. For example, the casino must file a W2-G if you win $1,200 or more at a time playing slots; but only if you win $1,500 or more at keno. Thus, if you have one or more wins exceeding the reporting threshold, the IRS will know that you won at least that much gambling income during the year. If this income is not listed on your tax return, you’ll likely hear from the IRS.
Over 4 million Form W-2Gs are filed each year. If you have one, you need to know what to do or you the IRS could claim you owe taxes on the money, even if you lost more than you won during the year. There are three things it’s crucial that you understand:
First, if, like the vast majority of people, you’re a recreational gambler, you’re supposed to report all your gambling winnings on your tax return every year. You may not, repeat NOT, subtract your losses from your winnings and only report the amount left over, if any. You’re supposed to report every penny you win, even if your losses exceeded your winnings for the year. Gamblers who don’t report at least as much as shown in their Form W-2Gs usually get audited.
Second, although you must list all your winnings on your tax return, you don't have to pay tax on the full amount. You are allowed to list your annual gambling losses as an itemized deduction on Schedule A of your tax return. If you lost as much as, or more than, you won during the year, the loss will offset any tax on your winnings. Even if you lost more than you won, you may only deduct as much as you won during the year. However, you get no deduction for your losses at all if you don’t itemize your deductions—just one of the ways gamblers are badly treated by the tax law.
Finally, you must be able to document the amount of both your winnings and losses. You’re supposed do this by keeping detailed records of all your gambling wins and losses during the year. This is where most gamblers slip up—they fail to keep adequate records (or any records at all). As a result, you can end up owing taxes on winnings reported to the IRS even though your losses exceed your winnings for the year. This has happened to many gamblers who failed to keep records.
What to do? If, like most gamblers, you haven’t kept good records, you need to gather as much information as you can about how much you won and lost gambling last year. There are many ways to do this. For example, if you gambled with a rewards card, the casino or other gambling establishment will have a computer record of your betting. Next, you (or your tax preparer) must prepare your return carefully and correctly to avoid IRS scrutiny. List all of your winnings in the income portion of IRS Form 1040; and your losses--up to the amount of your winnings--as a miscellaneous itemized deduction on Schedule A. If you do this, your return should fly through the IRS without attracting undue attention.
Stephen Fishman is the author of All In Against the IRS: Every Gambler’s Tax Guide, published by Pipsqueak Press. It is available from amazon.com.About the author: Stephen Fishman is an attorney and author based in the San Francisco Bay Area. He has written 19 books on tax law and other legal topics. He has been a columnist and speaker on legal issues dealing with taxes and small business, and has been quoted in the Wall Street Journal, Chicago Tribune, San Francisco Chronicle and many other publications.