April 15th will be here before you know it and the IRS is just waiting to take that big bite out of your earnings and your winnings. This is the first of a two part series of tax tips and will deal with issues for bettors. The second part deals with issues for horse owners.
The basic info you need to know is all gambling winnings are taxable, not just the big hits like a $2000 trifecta but also the little ones like a $10 pay-off on a $2 win bet. The big ones get taxed at the window before you are paid off: pay-offs of $5000 or more or any wager that pays at least 300-1. If you are lucky enough to hit a big one like this, you will get a form W-2G and 28% of the profit on the wager will be withheld (31% if you are a non-US resident and don't have a Social Security number).
When it is time to file your taxes, you will report your gambling income on line 21 of your form 1040. Remember, they expect you to claim all winnings and not just the ones you got a W-2G for. If you are ever audited, that will be one of the first things they look at.
If you itemize, you will also be able to deduct your gambling losses up to the amount of winnings you claim on Schedule A. If you file the short form, 1040A, you will still have to claim the earnings but won't be able to get the corresponding deduction for losses. Some people get around this by having a friend who already itemizes cash the ticket in their name, but remember this is illegal and you can get in trouble if you are caught.
If you already itemize you may think it is just a matter of picking up all the losing tickets you can carry to prove your losses for the deduction, but of course it isn't that simple. The IRS has very specific record keeping requirements for taking the gambling loss deduction (see page 15 of Publication 529). The first is a diary of winnings and losses showing the date, location, witnesses, a record of the races, amounts of wagers, amount collected on winning tickets, and lost on losing tickets. You must also have other proof of your winnings and losses like your W-2Gs, losing tickets, and bank or credit card withdrawals. Saving the program for the day is also a good idea and would make a good place to write down all your records for the day.
All this sounds like a lot of trouble and that is deliberate of course. The harder it is to claim the deduction, then fewer people will go to the trouble of claiming it. Less work for the IRS and more money for Uncle Sam. Good record keeping is a pain but is necessary to get the deduction coming to you and keep it in case you are audited. It will also help you see just how good (or bad) a gambler you are. The time to start is now, not after you get that first W-2G as that may be too late in the year to have enough properly recorded losses to offset the reported win.
Here are some links for more information on taxes and gambling if you wish to get more indepth information:
- Current IRS rules on gambling income and withholding - check page 15 for gambling rules
- Current IRS rules on gambling deductions - you really should read this one if you plan on taking this deduction. Gambling info starts on page 15
- Tax Topic 419 - Gambling Income and Expenses - from the IRS
- How to Keep More of What You Win by Walter L. Lewis. A gambler's guide to taxes. Also has it's own web site here.
- Keeping a Gambling Log - from the About guide to Casino Gambling
- Do I have to pay tax to the IRS on my gambling winnings? from WorldWideWeb Tax
- If I win money gambling do I have to pay tax on it? - tips from a CPA
- W-2G full form with instructions in PDF format
- Tax Planning - from About.com
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