Article Highlights:WinningsLossesDocumentationCharity RafflesSocial Security IncomeHealth Care Insurance Premium SubsidiesMedicare B & D PremiumsOnline Gambling AccountsDependentsAlthough gambling may seem to be a recreational activity for many taxpayers it is not for THE government. They look at it as a source of tax revenue and as one might expect, the government takes a cut if a gambler wins. What makes matters worse, tax laws do not allow recreational gamblers to claim a loss in excess of their winnings. There are far more tax issues related to gambling than one might expect, and they may impact taxes in more ways than one might believe. Here is a rundown on the many issues:Reporting Winnings – Taxpayers must report the full amount of their gambling winnings for the year as income on their 1040 returns. Gambling income includes, but is not limited to, winnings from lotteries, raffles, lotto tickets and scratchers, horse and dog races, and casinos, as well as the fair market value of prizes such as cars, houses, trips, or other non-cash prizes. The full amount of the winnings must be reported, not the net after subtracting losses. The exception to the last statement is that the cost of the winning ticket or winning spin on a slot machine is deductible from the gross winnings. For example, if a gambler put $1 into a slot machine and won $500, they would include $499 as the amount of their gross winnings, even if they had previously spent $50 feeding the machine.Frequently, gamblers with winnings only expect to report those winnings included on Form W-2G. However, while that form is only issued for “Certain Gambling Winnings,” the tax code requires all winnings to be reported. All winnings from gambling activities must be included when computing the deductible gambling losses, which is generally always an issue in a gambling loss audit.If winnings at one time hit certain levels, the government requires the gambling establishment to collect an individual’s Social Security number and report their winnings to Uncle Sam on a Form W-2G. Gambling establishments will issue a Form W-2G if the winnings are:$1,200 or more on a slot machine or from bingo.$1,500 or more on a keno jackpot.More than $5,000 in a poker tournament.$600 or more from all other games, but only if the payout is at least 300 times the wager.TAX TRAP #1 – The way the tax laws work, gambling winnings are included in a taxpayer’s adjusted gross income (AGI), while losses are an itemized deduction. Since winnings and losses can’t be netted, the full amount of the winnings ends up in a taxpayer’s adjusted gross income (AGI). The AGI is used to limit other tax benefits, as discussed later. So, the higher the AGI, the more other tax benefits may be limited.If the winnings minus the wager exceed $5,000 and the winnings are at least 300 times the wager, the gambling establishment is required to withhold 24% of the proceeds, which they then pay over to the government. The lucky taxpayer then claims this amount, which will be included on the W-2G form in box 4, as income tax withheld on their 1040 form. Some states may also require state income tax to be withheld. Taxpayers who have big gambling winnings on which tax isn’t withheld should consider making estimated tax payments to avoid underpayment of tax penalties.Reporting Losses – A taxpayer may deduct gambling losses suffered in the tax year as a miscellaneous itemized deduction but only to the extent of that year's gambling gains.TAX TRAP #2 – If a taxpayer does not itemize their deductions, they can’t deduct their losses. Thus, individuals taking the standard deduction will end up paying taxes on all of their winnings, even if they had a net loss.Documenting Losses – The next logical question is: how to document gambling losses if audited? Taxpayers shouldn’t rush down to the track and start collecting discarded tickets, since they generally aren’t acceptable documentation because of their ready availability. The IRS has published guidelines on acceptable documentation to verify losses. They indicate that an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, this diary should contain at least the following information:(1) The date and the type of specific wager or wagering activity,(2) The name of the gambling establishment,(3) The address or location of the gambling establishment,(4) The names of other persons (if any) present with the taxpayer at the gambling establishment, and(5) The amounts won or lost.Save all available documentation, including items such as losing lottery and keno tickets, checks, and casino credit slips. Also save any related documentation such as hotel bills, plane tickets, entry tickets, and other items that would document a taxpayer’s presence at a gambling location. If a taxpayer is a member of a slot club, the casino may be able to provide a record of electronic play. Affidavits from responsible gambling officials at the gambling facility may prove helpful. With regard to specific wagering transactions, winnings and losses might be further supported by:Keno – Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment.Slot Machines – A record of all winnings by date and time that each machine was played.Table Games – The number of the table at which the taxpayer was playing as well as casino credit card data indicating whether credit was issued in the pit or at the cashier's cage.Bingo – A record of the number of games played, the cost of tickets purchased, and the amounts collected on winning tickets.Racing – A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.Lotteries – A record of ticket purchase dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winning statements.