Gambling and Taxes: Part 3

 Part 3 

Keeping a Gambling Diary

     I know tax talk makes for pretty dull reading, but it’s a necessary topic. Stick with me and you’ll learn to keep more of what you’ve won when you file. I’ll try and keep this as simple as I can. 

     Previously we looked at a tax situation where the taxpayer couldn’t deduct his losses because he didn’t have more itemized deductions than his standard deduction. Even though he kept records for most of the year, he didn’t have enough to deduct what those records showed he lost gambling. But what if your situation was different? What if you could itemize. What if you were paying mortgage interest and property taxes and made charitable contributions and had other deductions that totaled more than your $6,200 standard deduction? Could you deduct any of your losses then?

     Suppose you also got a W2G for $4,000 from the casino where you played, but you knew that jackpot win wasn’t what usually happened. Usually you lost $100 or so on the slots when you played there almost every week. Suppose you also bought Powerball lottery tickets twice a week. Could you deduct any of those losses on your tax return?

     Well, it depends on what records you kept. Fair or not, the IRS says you have to keep records to deduct losses. If you don’t and you are audited, they can disallow part or all of your write-offs. They can refigure your taxes using only amounts you can prove and charge you tax and interest and even penalties on the difference. 

     That doesn’t seem fair, you say. I didn’t know I had to have proof of how much I lost, you say. It’s not right that the casino reported the $4,000 jackpot I won, but didn’t report all the money I lost during the year, you say. 

     No, it’s probably not fair, but that’s the way it is right now. Currently, casinos are only required to report winnings of over $1,200 from slots or bingo games and $1,500 or more from keno wins. Tracks have to report wins of $600 or more from horse or dog racing. None of them likes doing this. None of them wants to go to the trouble of reporting every payout for every gambler every time he plays. Who wants to fill out all that paperwork for the government if they don’t have to? They’ll report what the law says they have to report (your big wins), and they’ll leave it up to you to track the rest of it.

     IRS publishes revenue procedures to help taxpayers and tax preparers understand what the law requires. The revenue procedure that provides guidelines for wagering income and losses is Revenue Procedure 77- 29. It was published almost 38 years ago and went into effect May 10, 1977. It hasn’t been changed since. That seems like a long time to go without an update, but that’s the way it stands right now. It’s what will determine the taxes you pay this year. You can read it on the internet if you like.

     If you do, you’ll be told that in order to substantiate and deduct your losses, you must keep a gambling diary. In it you are expected to record every time you gambled, when and where you played, who you were with that could back up your claims, and how much you won or loss each session. They don’t tell you what a session is. Is it a single wager or is it all the wagers made on a single machine or maybe it could be all the wagers made during the entire casino visit on a single day? New regulations will be written later this summer that will clarify this, but for right now, you are on your own. Tax courts have ruled, however, that a gambler could not reasonably be expected to record the results of every individual spin of the slot machine. If you haven’t been keeping a gambling diary, start now. Sites on the internet will offer to sell you journals that you can use for this, but any notebook or computer spreadsheet will do.

     Don’t wait for the “big one” to start keeping records. Yes, it’s a pain to log your results each time you wager, but it’s not as painful as paying taxes on the entire jackpot win because you didn’t take the time to write down the information about your losses in a notebook.

     Along with your journal, the IRS says you have to keep verifiable supporting documentation like bank withdrawals records, cancelled checks, ATM receipts, losing lottery tickets, and statements provided by the casinos. Some of the suggestions in this 38 year old procedure seem unreasonable and outdated today. For instance, it suggests you write down the machine number for each slot you played and tells you ask the casino operator for it if you don’t see it. There are suggestions as to what supporting evidence you should keep for other forms of gambling like bingo, and horse racing, and table games in that revenue procedure too. 

      Here’s the most important thing to know if you are able to itemize and deduct losses against gambling income. The income and losses don’t have to come from the same form of gambling! You can have winnings from slots and table games on line 21 of your 1040 form and losses on your Schedule A from bingo games and lottery tickets and horse racing as well.  

     Gambling losses are gambling losses no matter where you lost the money. Gambling winnings are taxable income no matter where you won it. And it’s all easier to report and you’ll give IRS less of your hard earned money if you’ve kept good records every time you’ve played. 

     Hopefully when the new gambling regs come out later this year, IRS will clear up some of the problems with the old ones. Watch this site for more information as it becomes available.