Tax Deductions:

Taxes on Gambling Income and Losses

There are only two issues people who gamble are concerned with, how much do they get taxed on their gambling income and how much of their gambling losses is tax deductible.

The answer to the first question is this; gambling income is anything your client has gotten from local or state lotteries, from any casinos across the country, horse races, and from prizes like cars and other properties. And this is the math; for any amount over $600, the establishment or the business will issue a form W-2G. You use this W-2G as evidence when you file their taxes and/or if you get audited. With the IRS record keeping is essential. If your client does not have anything to back their claims, the IRS is not going to be convinced. You have to report all your income accurately. Your client should keep the following records every time he earns any income through gambling or loss income through gambling for deduction:

The amount of winnings or loss
Witnesses to his winnings or losses like friends that accompanied him or at least someone else there
Name and location of that establishment or business
The date of the gambling activity (being specific only helps)
The amount your client used for a wager and in what kind of activity. For example if he bought a $2 dollar lottery ticket. $2 is his wager and the purchasing of the lottery ticket is his activity.

For any winnings over $5000, the establishment or business is required to withhold 28% of the income for federal income tax. If your client does not have his social security card with him at the time of the winning, they will withhold 31%.

When it comes to gambling losses, the IRS is very strict. Every year they get taxes from people in which gambling income is shrinked down almost to nothing and the losses are skyrocketed. The IRS has a simple rule for gambling losses; you can only claim deduction on losses equal to or less than the winnings. For example, your client wins $300 and then loses $700 in gambling for a tax year. You can only claim up to $300 in losses for him, no more. The only good thing happens to be that IRS is not too particular about how your client lost his money as long as it was gambling. If he won $300 in the lotto and he can claim any $300 that he lost at the casinos or horse races.

Another good reason for record keeping is that gambling income and losses are one of the favorite red flags the IRS looks for in auditing people. So have all your client's paperwork in order because you never know when the IRS is going to come for him!