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you win at the casino, get a prize in a sweepstakes, or a bet on a horse race, it doesn’t matter. The amount you won minus the amount of your wager is considered income. And income means income taxes. So, don’t assume that your gambling income is somehow tax-free. In fact, gambling income is taxed like any other source of ordinary income.

      

Under certain conditions, the casino will do you the favor of paying some of your income tax in advance, regardless of whether you like it. If you win a poker tournament and the prize is $5,000 more than the entry fee, $1,200 at a slot machine, or $1,500 at keno, the casino will report it to the IRS using a form W-2G (guess what the G stands for…). Additionally, if you win a progressive bet of at least $600 where the winning amount was 300 times greater than the bet (for example, a 1,000 to 1 payoff from a royal flush on the six-card bonus bet on a three-card poker hand), the casino gives you 76% of your prize and sends 24% to the IRS.

      Does that mean you pay 24% tax on that win? No. Like the tax withholding on your paycheck, 24% is the share of winnings that gets withheld or sent to the IRS as a down payment on your annual income tax. If you have ever had a job that paid out a bonus, you’ll be familiar with automatic withholding requirements. What you actually owe is something you calculate at tax time.

      So if you do your tax return and find your marginal tax rate is lower than 24%, the IRS will return some of those dollars back to you that the casino sent them earlier in the year. It’s also possible you’ve made so much money that your marginal tax rate is higher than 24%. That’s after exemptions, deductions, write-offs, and other accounting techniques to lower your taxes. If your marginal tax rate is more than 24%, Te Salute, Don Corleone. Just keep in mind that, unlike your paycheck, where you choose (roughly) how much is withheld, the casino has no choice in the matter. They are legally obligated to send 24% to the IRS. The government will kindly hold on to your dough until you prove you deserve some of it back next April.

      

If it’s not clear to you by now, this book is not your go-to source for every possible scenario of how your gambling affects your tax return. Just know that losses are not as straightforward as winnings. Did you win money gambling? It’s subject to income tax. Did you have some losses, too? You can deduct those from your winnings if you itemize your deductions. The bad news is, if you’re taking the standard deduction, you can’t subtract losses from winnings. And to add insult to injury, if you had a losing year, the amount of losses you can deduct can’t exceed the amount you won.

For example, say you had winnings of $4,300 for the year and losses of $5,000. You may assume that the higher losses cancel out the win, so you don’t owe any tax. But when your total deductions (including your gambling losses of $5,000) are less than the standard deduction (for a married couple filing jointly, that’s $25,100), you can’t take any of those losses on your return because you aren’t itemizing. Unfortunately, you still must pay taxes on your winnings, even though you actually lost. Confused? Welcome to the crazy world of the tax code.

      Unreported winnings: Don’t fool the IRS

      It’s a known fact that casinos typically report some activity to the IRS — but not all. In almost every setting, the house alerts the IRS with a Currency Transaction Report by Casinos (CTRC) when a player buys in or cashes out for $10,000 or more in one day. The same is true if you make a $10,000 bet on a horse or a sporting event.

      

Don’t waste your time begging casino employees not to fill out tax forms on you (either a CTRC or a W-2G). U.S. laws require these forms, and trying to avoid them can land you in hot water. Casinos send the W-2G to Uncle Sam, and you get a copy at the end of the year. Make sure you include a copy when you file your return.

      Hopeful gamblers may believe they only have to pay taxes on winnings that the casino reports to the IRS. Not true. All gambling winnings are subject to taxation, whether they come from a foreign country, the Internet, your neighbor’s poker game, a church bingo night, or a casino. Many players ignore this law, however, figuring Big Brother won’t find out about their small wins.

      

The IRS can conceivably obtain records from your favorite casino to determine your yearly win or loss, although I’m not aware of any such cases. But remember this principle: Underpaying your taxes is a crime. So, even if your chance of getting caught is small, it’s not worth the gamble.

      Counting comps for tax purposes

      Comps (the free perks that casinos give to gamblers) pose a gray area in tax reporting. Technically, casino comps are income, but the government is likely to care only when you receive substantial gifts or luxury merchandise, such as an expensive watch or a new speedboat.

      Few gamblers lose enough money to have casinos ship them a luxury car for Christmas. Most comps are soft — meaning the casino doesn’t incur a hard cost for them. Examples of soft costs are hotel accommodations or the dinner buffet. (Check out Chapter 20 for ways to score comps.)

      Lowering your gambling tax

      For most recreational gamblers, there aren’t many ways to reduce taxes on winnings. If gambling is a hobby, which is true 99.9 percent of the time, then you can’t deduct any expenses — only your losses. Professional gamblers can deduct expenses, but a rigid list of requirements prevents all but a handful of diehards from qualifying as professional gamblers.

      

The only tax-reducing tool for recreational players is a log of gambling activity (see the next section for what you need to record). Because you can only deduct substantiated losses, you must be able to verify your losses in order to offset your wins.

      Keeping a log may seem unnecessary for people who expect to show a net loss for the year. However, one of the appeals of gambling is that the unexpected can happen. For example, you take four trips a year to Vegas and play dollar slot machines. The first three trips are losers and leave you $2,200 in the hole. However, on the last hour of the last day of your last trip, you line up three diamonds and win $2,000.

      In this scenario, the IRS assumes you won at least $2,000 for the year because they received notice of this $2,000 win from the casino in the W-2G form. If you can’t document those losses, you can’t offset the $2000 win and will have to pay income tax on it. You not only added insult to injury, you’ve possibly added insolvency as well.

      Keeping a gambling log

      The IRS addresses the issue of proper record-keeping and documentation for gamblers. The basic requirements include

       Date and type of gambling event (poker, blackjack, and so on)

       Name and location of casino, racetrack, or gambling venue

       Table or slot machine number where gambling took place

       Who you were with when gambling

       Total dollar amount you won or lost

      

If you neglected to track these details, you’re permitted to use airline tickets, canceled checks, bank withdrawals, credit card cash advances, losing betting stubs, or yearly statements of your win/loss from the casino as additional collaboration. The burden of proof rests on you, the taxpayer, so the better your records, the better your chances of surviving an audit.

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