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Fox News Story 2/24/2006
|Copyright© 2006 Colin M. Cody, CPA and ProfessionalGamblerStatus.com, LLC, All Rights Reserved.|
Gambling With Your Taxes: How to Report Your Wagers
By Gail Buckner, CFP
Friday, February 24, 2006
Gambling winnings are considered income and must be reported. This includes the proceeds from such things as betting on horses, slot machines, black jack, bingo, the lottery, etc. It doesnít matter if your prize is cash, a new car, or a vacation. (With tangible prizes you have to report the cash value.)
Section 61 of the Internal Revenue code is pretty clear:
"gross income" must be reported and includes "all income from whatever source derived."
In some cases, the sponsor of the contest will provide you with Form W-2G spelling out the exact value of your winnings and whether any federal tax was withheld. But even if you donít receive this, youíre legally required to report any prizes you win.
Unfortunately, if you have gambling income, the only income tax form you can use is the long, "Form 1040." The total amount of your winnings for the year is entered on Line 21.
Realistically, itís not likely the I.R.S. is going to police the bingo game played in the church basement. But if your prize comes to more than a few bucks, thereís a good chance the organization sponsoring the activity is going to report it to the I.R.S.
Youíd better report it, too.
Remosí defense? He testified that the pit boss at the casino had told him that winnings you receive on a gambling table are not considered "income," while money you win from a slot machine is. In case you have any doubts, re-read paragraph two above. (Can you already see where this case is headed?)
Furthermore, Remos claimed that he actually lost more than he won in 1999, so this completely offset his winnings and wiped out any income tax that he might owe. In court, he submitted a computer printout from the casino that listed such things as "money in" and "money out," but he couldnít explain how the numbers were generated. It also didnít help that Remosís name wasnít on the printout, so there was no way for the court to know if it even applied to him!
The Tax Court acknowledged that although Remos "most likely had some gambling losses during the year, we are unable to determineÖ the amount of those losses on the basis of the record at hand." He lost the case.
Document Your Deduction!
If betting on the lottery is your thing, then hold on to your ticket stubs. The court is very clear that the burden of proof is on the taxpayer to demonstrate s/he sustained any losses.
Provided youíve kept good records, you can deduct your gambling losses. But you donít do this by subtracting them from the total amount of your winnings. Instead, they are considered a "Miscellaneous Itemized Deduction." This means that your gambling losses wonít reduce your tax bill unless they, and the other items you list under "Miscellaneous Itemized Deductions" (such as tax return preparation fees and home office expenses) add up to more than 2% of your Adjusted Gross Income.
Furthermore, you can only deduct losses up to the amount of your winnings- you canít deduct losses over and above the amount you win. For instance, if your total gambling winnings amount to $2000 and your losses add up to $2,500, the maximum amount you can list as a Miscellaneous Itemized Deduction is $2,000.
The U.S. Supreme Court has ruled that for an activity to be elevated from the level of "hobby" to constitute a "trade or business" it must be "pursued full time, in good faith, and with regularity, to the production of income for a livelihood."*
Thus, she was not entitled to deduct her gambling losses as a business expense.
No Wager, No Gamble
In a Technical Advice Memorandum (T.A.M.) issued in 2004, the I.R.S. explained that three conditions must exist for an activity to be considered "gambling." There must be: 1) a prize, (2) a chance, and 3) consideration paid by contestants.
To see how this might come into play, suppose you spend $10 per week on lotto tickets. You also respond to those contests aimed at generating magazine subscriptions where the chance of winning is one-in-a-gazillion. Furthermore, letís assume that when you enter these contests you donít take the bait, i.e. you send in your entry but donít sign up for any magazines.
Over the course of the year, although you spend $5,200 on lotto tickets, you never hit the jackpot. You end up with $5,200 in gambling losses.
If you miraculously win the magazine sweepstakes, you wonít be able to use your lotto losses to offset this income. Since you didnít wager anything to participate in the sweepstakes it isnít considered "gambling." Remember: you can only deduct gambling losses to the extent you have gambling income.
You can find out more about reporting gambling winnings/deductions from I.R.S. Publications 529, "Miscellaneous Deductions," and 525, "Taxable and Nontaxable Income." You can download these from the I.R.S. website, www.irs.gov, or order them by calling 1-800-TAX-FORM.
May 27, 2007
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