Gambling And Tax Traps - Nissen and Associates

If you spend much time in a casio, it’s important to be aware of gambling and tax traps that can occur. Although gambling may seem to be a recreational activity for many taxpayers that is not the case concerning 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 this issues may significantly impact taxes in far more ways than one might expect.

Here are various gambling and tax traps to be aware of:

Reporting Winnings

Taxpayers must report the full amount of their gambling winnings for the year as income on their 1040 returns. Gambling income includes winnings from lotteries, raffles, lotto tickets and scratchers, horse and dog races, and casinos. Also the fair market value of prizes such as cars, houses, trips, or other non-cash prizes. Which means not just reporting the net winnings, 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 hit a certain level, the government requires the gambling establishment to collect an individual’s Social Security number. In addition, individuals must report 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 in the tax world, losses are considered 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. This then must be handed over to the government. The lucky taxpayer then claims the withholdings 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 regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses.

Recordkeeping should include the following information:

The date and the type of specific wager or wagering activity,
The name of the gambling establishment,
The address or location of the gambling establishment,
The names of other persons (if any) present with the taxpayer at the gambling establishment, and
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. Specific supporting documentation could also include:

Keno – Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment.
Slot Machines – Record all winnings by date and time that each machine was played.
Table Games – Include the table number 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.

Additional gambling and tax traps to consider

Gambling Sessions

There is a concept of gambling “sessions” where the IRS allows netting of gain and losses. However, the record-keeping requirements are so stringent it makes its application extremely limited. We aren’t planning to cover this in detail in this article. But consider that the concept basically allows gamblers to net gains and losses from gambling sessions.

However, defining gambling sessions is very limiting. It must be the same type of uninterrupted wagering during a specific uninterrupted period of time at a specific location. Thus, if a taxpayer entered a casino and played slots for an hour, then switched to craps for the next hour, that would be two separate gambling sessions. If a taxpayer entered Casino #1 and played slots for an hour and then went to Casino #2 and continued to play slots, that would be two separate gambling activities, as two locations were involved. Plus, one must adequately document locations and machines.

Charity Raffles

The IRS considers raffles, bingo, lotteries, etc., to be gambling, even if the sponsor of the activity is a charitable organization. So, winnings and losses are treated the same as for any other gambling activity. The amount(s) paid to buy raffle or lottery tickets or to play bingo or other games of chance are not deductible as a charitable contribution.

Side effects of gambling and tax traps to be aware of

Social Security Income

For taxpayers receiving Social Security benefits, whether those benefits are taxable depends upon the taxpayer’s income (AGI) for the year. The taxation threshold for Social Security benefits is as follows:

$32,000 for married taxpayers filing jointly
$0 for married taxpayers filing separately
$25,000 for all other filing statuses.

If the sum of AGI (before including any SS income), interest income from municipal bonds, and one-half the amount of SS benefits received for the year exceeds the threshold amount, then 50–85% of the SS benefit is taxable.

TAX TRAP #3

If an individual’s gambling winnings push their AGI for the year over the threshold amount, the gambling winnings can cause up to 85% of their Social Security benefits to become taxable. Even if they had a net loss!

Health Insurance Subsidies

Lower-income individuals who purchase their health insurance from a government marketplace are given a subsidy in the form of a tax credit to help pay the cost of their health insurance. Most people eligible for the tax credit use it to reduce their monthly health insurance premiums. That tax credit is based upon the AGIs of all members of the family. The higher the family income, the lower the subsidy becomes.

TAX TRAP #4

The addition of gambling income to a family’s income can result in significant reductions in the health insurance subsidy. This would then require families to pay more for their health insurance coverage for the year. Additionally, consider if the subsidy was based upon estimated income for the year. If the family’s premiums were reduced by applying the subsidy in advance, and if they subsequently had some gambling winnings, then they could get stuck with paying back some or all of the subsidy when they file their return for the year.

Medicare B & D Premiums

Taxpayers covered by Medicare must pay for Medicare B premiums. Premiums for 2021 are normally $148.50 per month. This is based on their AGI two years prior. However, if that AGI was above $88,000 $176,000 for married taxpayers filing jointly), the monthly premiums can increase to as much as $504.90. If they also have prescription drug coverage through Medicare Part D, and if their AGI exceeds the $88,000 /$176,000 threshold, the monthly surcharge for Part D coverage will range from $12.30 to $77.10. The normal monthly premium amount, the AGI thresholds, and the Part D monthly surcharge vary from year to year, and for 2022 are $170.10, $91,000/$182,000, and $12.40 respectively.

TAX TRAP #5

The addition of gambling winnings to AGI can result in higher Medicare B & D premiums.

Online Gambling Accounts

Often online gambling accounts are with foreign companies. These next gambling tax traps have to deal with the amounts of gambling. This is because there is a trigger number to consider. All U.S. persons with a financial interest over foreign accounts with an balance over $10,000 must report those accounts. Accounts must be reported to the Treasury by the April due date for filing individual tax returns. If not, those US citizens face draconian penalties.

TAX TRAP #6

If an online gambling account was over $10,000 at any time throughout the year, the owner is required to file Form 114. This is regardless if they are a gambling winner or loser. FinCEN Form 114 is a Report of Foreign Bank and Financial Accounts, commonly referred to as the FBAR. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations $100,000 or 50% of the account’s balance at the time of the violation. (Whichever is the most). The $10,000 and $100,000 penalty amounts are subject to adjustment for inflation. After January 21, 2022, are $14,489 and $144,886, respectively.

Parents As Dependents

If a taxpayer claims someone as a dependent, say, their mother. And Mom happens to hit a jackpot at the local casino one November. That taxpayer may end up being unable to claim her as a dependent for the year if the gambling winnings push Mom’s income over the annual gross income limit for claiming her.

Other Limitations

The aforementioned are the most significant “gotchas”. Numerous other tax rules limit tax benefits based on AGI, as discussed in Tax Trap #1. These include the following: