If you have losses, you can deduct those losses up to the amount of winnings. But the catch is, aside from the bet you made on the specific transaction that produced the win, you must itemize your deductions in order to benefit from the losses. If all your itemized deductions collectively are too low to benefit from itemizing, your gambling deduction is buried in the standard deduction. If you lost more than you won, the excess loss is lost.
The gambling establishments (any person in the trade or business of gambling) have certain requirements to provide documentation to the IRS and the winner. They must issue a Form W-2G to anyone who receives $600 or more in winnings from state lotteries; $600 or more from horse racing, dog racing, or jai alai if the winnings are at least 300 times the wager; $1,200 or more in winnings from bingo or slot machines; and $1,500 or more in winnings from Keno. Certain types of winnings are subject to income tax withholding when the winnings exceed $5,000. But even if you didn’t win enough to require the establishment to send a Form W-2G, you’re not excused from reporting the income.
You might say, “I took a $100 and didn’t come home with any extra; therefore, I don’t have to report anything.” If you bet the money and did not win anything back, your income is zero and your nondeductible loss is $100. But maybe you put the money into a slot machine that paid off $400. You were feeling lucky and put the money back in and lost it again. Tax law says the $400 is reportable gambling income. It is up to you to prove that you lost the $400.
Back in 1977, the IRS provided guidance on what they would consider as substantiation of the gambling activity. This directive is still being used in 2004. The IRS is looking for an accurate diary or similar record regularly maintained by you along with verifiable documents to back up the entries. See the chart that follows for the proper entries your diary should contain.
Wagering tickets, scratch-off tickets, canceled checks, credit records, ATM withdrawals, bank withdrawals and statements, actual winnings or payment slips provided by the establishment, Forms W2-G, and other IRS documents may be used to verify the diary. If you travel away from home, hotel records can help to place you at the scene of the winnings or losses.
Documentation for specific games has been identified. For Keno, copies of validated Keno tickets that you have purchased, copies of casino credit records, and copies of your casino check cashing records are required. The date and time the machine was played as well as the number on the winning machine should verify slot machine winnings. Table games are substantiated by giving the number of the table where the winning occurred as well as information telling whether you used the credit from one table at another table or whether it was cashed in at the cashier’s cage. Racing winnings are backed up by a record of all wagers made, amounts collected, and amounts lost on losing tickets. It’s probably not a good idea to have a lot of losing tickets with footprints on them! Unredeemed tickets can support lottery losses while winnings are upheld by payment slips.
Why is all of this important? The new commissioner of the IRS has made it clear that enforcement of tax laws is a primary objective of his administration. More audits are currently taking place. To win an audit, you must be prepared with the proper documents to back up your deductions. Don’t take this as a threat by the IRS, just protect yourself by keeping good records.
Here’s one last reminder for those who pool resources to buy lottery tickets. If your group is fortunate enough to win, you will want to give all the names and identification numbers of the winners to the redeeming agent. If you do not identify the winners as a group at redemption, the Form W-2G will be issued in the name of the person who presented the winning ticket. That means that person is responsible for the tax on the winnings!
Gambling Diary
1. Date and type of specific wager or wagering activity > Slot machines #223; #254
2. Name of gambling establishment > MGM Grand
3. Address or location of gambling establishment > Las Vegas, NV
4. Name(s) of other person(s) (if any) present > Spouse
with the taxpayer at gambling establishment
5. Amount(s) won or lost > Winnings $500
> Loss $200