IRS Requirements for You

As far as the IRS is concerned, all gambling winnings are taxable and must be reported as income. This applies to charitable gambling and online gambling as well as the commercial variety; it even applies to illegal gambling. Whether your gambling is legitimate or not, the federal government expects you to report it.

Because tax laws and regulations change often, your wisest move is to consult your tax adviser about your specific situation. However, keep in mind that the burden of proof is on the taxpayer. If you get audited and don't have the documentation to support your claims of gambling wins and losses, you could end up paying penalties.

The IRS considers all gambling winnings taxable, even if your winnings don't meet the reporting requirements for a W-2G. If you wager and win only small amounts, these easily can cancel each other out on your income tax return. However, you can claim gambling losses as a deduction only if you itemize.

If your winnings meet the reporting limits discussed previously, you'll receive copies of the W-2G form from the casino, usually by the end of January for the previous tax year. On your tax form, you enter the amounts from your W-2Gs as “other income.” If you itemize, you can deduct your gambling losses, but only up to the amount of your winnings. For example, if you won $10,000 but lost $18,000, you can only claim $10,000 in losses.

Proof of Wins and Losses

The IRS requires you to keep an accurate record of your wins and losses, plus supporting documents that will prove those wins and losses during an audit. In addition to your W-2G forms, the IRS recommends keeping validated keno or bingo tickets, canceled checks, payment slips, and other records you routinely get from the casino. You should keep these records for as long as you keep other income tax records — usually a minimum of seven years.

On your tax return, you can claim gambling losses as a deduction only if you itemize. If you take the standard tax deduction and don't itemize, you have to report your gambling income but cannot claim your losses. Married couples must combine their wins and losses when they file a joint tax return. You cannot “lump” your wins and losses; that is, you can't just report zero dollars in gambling winnings if you ended up losing more than you won. Finally, the IRS requires taxpayers to report wins and losses only in the year in which they occur. You can't carry losses forward or apply them to previous years to offset your winnings.

State Income Tax Requirements

Tax laws vary from state to state. Some levy income tax on your gambling winnings; some allow you to deduct the federal income tax you paid on those winnings; and some don't bother with gambling winnings at all. You also might have to file a tax return in the state where you won, even if you don't live there.

For example, if you live in California but had gambling winnings in Mississippi, you might be required to file a nonresident tax return with Mississippi. California may allow you to deduct part or all of the taxes you paid to Mississippi when you file your state income tax return. Check with your tax adviser to find out what the laws and regulations are in your state.

If you gamble and win in other countries, you'll have to declare those winnings on your federal tax return, and you may have to file a nonresident tax return in the country where you won. Each country has its own rules and tax treaties with the United States; be sure to ask what the requirements are when you're at an overseas casino.

Comps as Taxable Income

Those free trips to the buffet, discounted hotel rooms, and match play coupons — all the incentives casinos shower upon you to keep you on the gaming floor or to motivate you to return — are considered gambling winnings and are therefore taxable. The casino should be able to give you a listing of the comps you received and their dollar value, but you may have to ask for it. The good news is that, with proper record keeping, you can apply your gambling losses against both your cash winnings and your comps.

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