If you’re like many Americans, you enjoy gambling. Perhaps you hit Atlantic City or even Vegas a few times a year, having fun while winning a few bucks. But how does your gambling affect your taxes?
Gambling winnings are considered taxable income, which means that you must report them as such for purposes of both federal and state income taxes. To offset these winnings, you can list your annual gambling losses on Schedule A of your tax return. However, if you don’t keep good records, you could find yourself facing an IRS gambling losses audit.
Gambling losses are often a trigger for IRS audits because most people don’t keep careful records of how much they lost while at the casino, racetrack, or another gambling establishment. While you are permitted to deduct gambling losses up to the amount of your winnings, doing so could lead to an audit. If you find yourself facing this type of audit, a seasoned IRS audit lawyer can defend you and protect your rights.
Reporting Gambling Winnings and Losses
In 2016 alone, nearly $120 billion was lost in American casinos. Gambling can be a lot of fun, but the saying “the house always wins” exists for a reason. If you’re a gambler, it is far more likely that you will lose money than it is that you will strike it big.
Under U.S. tax law, people who gamble recreationally (i.e., not as professionals) are permitted to deduct their losses. This amount can be used to offset gambling income, which must be reported to the IRS as taxable income. Gambling losses cannot be deducted from your non-gambling income.
When you win money through gambling, you may receive a Form W2-G to report that certain winnings to the IRS. Other gambling winnings can be reported directly on your Form 1040 as “other income.” Typically, you will receive a Form W2-G from established gambling businesses, like a casino or race track, and not from things like a local bingo hall or an informal poker tournament.
You can then itemize your losses on Schedule A as other itemized deductions. These losses are then deducted from your gambling winnings to reduce your taxable income, up to the amount of your winnings.
For example, if you won $5,000 through gambling in 2020, you would report that as taxable income. If you lost $7,500 through gambling that same year, then you would list those losses on Schedule A. This would effectively cancel out your winnings so that you wouldn’t be required to pay taxes on the $5,000. Losses that exceed your winnings ($2,500 in this example) cannot be carried over to the next year or used to offset other sources of non-gambling income.
How to Avoid an IRS Gambling Losses Audit
The ability to deduct gambling losses is important — but you will need to be able to prove that you actually suffered those losses. When most of us gamble, we aren’t taking careful notes of what we spent or even what day we spent it. This is particularly true if we are having a few drinks while hitting the blackjack tables.
Unfortunately, the IRS requires you to keep a record of your gambling winnings or losses. This record can then be used to prove that you incurred certain losses or won money through gambling. At a minimum, these records should contain:
- The date you gambled
- The type of gambling involved
- The people you gambled with
- The name and address of where you gambled
- The amount you won and lost
Taking the time to record these things can protect you from an audit.
These records should include any gambling that you participate in, such as lotteries, slot machines, keno, casino games, poker, sports betting, horse and dog races, sweepstakes, and off-track betting. They should also include the fair market value of prizes, like cars and trips.
Because most people don’t keep careful records of their gambling losses, itemizing these losses is often a red flag for the IRS — particularly if the losses are significant and/or completely offset gambling winnings. This can lead to an IRS audit.
If you do receive an audit letter from the IRS, you should contact a skilled IRS audit lawyer as soon as possible. Your attorney will help you put together the necessary documentation and develop a legal strategy to achieve a successful outcome.
Facing an IRS Audit? We’re Here to Help.
Receiving an IRS audit letter can be incredibly scary. Depending on how the audit goes, you could be facing a massive tax bill. A seasoned IRS tax audit attorney can advocate for you and help you get the best possible result: a “no change” letter.
At Paladini Law, we represent individuals and businesses in a range of tax matters. We use our extensive knowledge of both federal and state tax law to help you handle even the most complicated tax issues. To learn more or to schedule a consultation with a member of our team, contact us today at 201-381-4472 or fill out our online contact form.