About Gambling and Taxes

Most of us don't think about taxes when gambling. Unfortunately, this oversight leads many to underreport income. Gambling winnings are considered income and as income, must be reported to the IRS on your tax return. Gambling income includes winnings from casinos, horse races, dog races, raffles and lotteries, as well as the fair market value of prize winnings like trips, cars houses or home appliances. Essentially, any cash or non-cash item won by chance is considered taxable and needs to be included on your tax return.

Deducting Gambling Losses

If you suffered gambling losses, you can deduct the losses only if you itemize your deductions. Taxpayers using the standard deduction must report their gambling winnings, but are not be able to deduct their losses.

The amount of gambling losses you deduct cannot be more than the amount of gambling income you report on your tax return. For example, if you lost $12,000 gambling, but won a total of $10,000, you can only deduct $10,000 of your losses.

To deduct losses, you need to be able to provide the receipts for your winnings and the losses with the name and address of the gambling facility, the amount of loss suffered, and the date on which the losses were suffered. Any document, statement or ticket, which has the name, date and the amount of losses, can be used as proof. There needs to be documentary proof of all the winnings and the losses suffered to correctly estimate the difference.

You can claim your gambling losses using Form 1040 Schedule A. Claim the losses as "Other Miscellaneous Deductions" that are not subject to the 2 percent limit. Winnings must be reported on your 1040 as "Other Income."

Withholding of Winnings

Depending on the type of game and the amount of winnings, the casino or other payer may withhold taxes from your winnings and issue you IRS Form W-2G, Certain Gambling Winnings. This form shows the amount of your winnings and the amount of taxes the payer has withheld. You will need to use this form when you file your tax return.

Keeping a Record

It is important to ask for and keep the receipts of all the wins and losses. If your winnings are more than your losses, you will need to pay taxes on the difference. If your losses exceed your winnings, you can make deductions. Remember to keep a written proof of your non-cash winnings along with the cash winnings for accurate filing of taxes. When you ask for a receipt or a statement, make sure the document has the name, date and correct amount of winnings or losses.

Keeping accurate records ensures that you pay all the taxes owed and claim deductions correctly. Remember that the IRS charges penalty for the understatement of income, intentional or not. Therefore, it is important to keep taxes in mind when gambling, betting on a horse or playing in a casino. Even though paying taxes on chance winnings might hurt, a deduction can soften the blow of a loss.

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