It’s that time of year again. Less than three weeks to go until the dreaded April 15 tax deadline for 2015 arrives. Less than three weeks to go to figure out what to do with that collection of W2G forms the casinos gave us for all those many hand pays we had last year. (Ha Ha) Less than three weeks left to figure out if there is anything we can do to deduct any of those losses our casino win/loss statements say we had for the year. It’s a little late to start planning, and we vow we’ll do better keeping records for 2016, but in the meantime we need to know what can we do now to minimize that tax hit.
Not much, I’m afraid. Part of the problem is the tax laws as written do not treat everyone equally. If you’re a young person just starting out or an older person living on your social security checks, you are NOT going to pay the same amount of tax on the same amount of income as your middle age, middle class neighbors. You will pay on more of what the machines gave back to you and you will be able to deduct less of what the machines kept than those neighbors. And those middle aged, middle class casual gamblers will pay more than the high rollers will on their big wins. Fair? I don’t think so. But it’s the way it is. And it’s part of what makes taxes hard to do.
The inequity in the law stems from the fact that ALL income from any source is taxable (unless specifically excluded by law) and only SOME expenses of earning income from various sources is deductible — and usually, only if you are able to itemize.
Itemizing, what is itemizing you ask.
OK, to put it simply, we all get a deduction on our 1040 forms on line 40 for an amount of income that varies based on our filing status. For single filers under 65 the amount is $6,300 this tax year, but if they are single parents or are caring for other qualifying relatives and meet the requirements for Head of Household filing status, it is $9,250. Married couples filing jointly get a deduction of $12,600. (There are slightly higher deductions for filers over 65 or legally blind - see the instructions.) Filers who chose to use these figures are not itemizing. They are deducting a standard deduction instead of itemizing.
Other taxpayers have expenses that the law allows deductions for, and if a taxpayer has more of these deductible expenses than their standard deduction, they can choose to deduct that amount instead. These deductions are figured on Schedule A. The most common itemized deductions are home mortgage interest, property taxes, charitable contributions, limited unreimbursed business expenses and limited casualty and theft losses, and gambling losses (up to the amount of claimed gambling winnings.) The middle class, middle aged, and middle income and the wealthy filers will usually be able to itemize. Young people just starting out and elderly taxpayers who no longer have mortgages and/or are over 65 usually can’t, though some can. The wealthy may have some of their deductions limited, but they will usually have no trouble exceeding the standard deduction amount. But the bottom line is, some people who won $3,000 gambling in a casino will have to pay tax on all of it (because their standard deduction is more than their itemized one), some will pay tax on an amount equal to part of it, and some will pay no federal tax at all on the same $3,000 (because their itemized deduction were already more than their standard deduction.) And most, but not all, will pay state tax on the money too.
Here's an example.
Lets say in 2015 you got a $3,000 hand pay playing the slots. And let’s say that you made another $2,000 total on your winning casino trips and that you lost $1,800 on your losing trips. How much of this does the government know about? Probably only the $3,000 from the hand pay. They know about that money because the casino sent them a copy of the W2G they gave you when you had the win. The government computers are programmed to compare the amount of gambling income you report on line 21 of your 1040 with the W2G totals they get — just as they compare the wage total you report on line 7 with the W2 total sent in by your employers. And, just as some people “work under the table,” some gamers “gamble under the table.” Not all income people have is always reported and taxed.
Most mail “audits” are not real audits at all. They are computer generated notices of discrepancy sent because your figures reported on your return don’t match the amounts reported to the IRS by the payers. Whenever there is a discrepancy the government sends out notices of proposed changes and gives the filer the chance to agree and pay or to disagree and explain. So many filers incorrectly report only their W2G totals as gambling winnings, and if nothing else shows up to “red flag” their returns, they are never questioned or charged for underreporting their income. These gamblers are gambling they can beat the system by claiming only income reported to the IRS.
But this isn’t what the law actually requires us to do. By law ANY income we have is taxable unless specifically excluded by law. So if you have a $3,000 W2G and you had $2,000 of other winning sessions besides, IRS wants you to have $5,000 on line 21, the line for other income. Will you hear from them if you claim only the $3,000 shown on the W2G? Probably not. Not unless there is something else suspicious about your return. If there is, and if there is a real audit on any issue where you or your preparer have to meet with an agent with your books and records, you can bet that the $3,000 of gambling winnings will be addressed also. Because, after all, how likely is it that that was your only gambling activity for the whole year - one visit, one win - I don’t think so. Is there a chance you will ever be called in to the IRS offices and audited? Probably not. But the more money you win gambling, and the more deductions you claim on Schedule A, the more likely it is. Time is money, and the government agents will spend their time where there is more money to be collected easily.
If you read the IRS literature, not only do you have to report all the income on your W2Gs, you also have to report all your gambling winnings not shown on W2Gs. Where would the IRS get that figure? If you are audited, they will ask to see your gambling diary. You say you didn’t keep one. Well then, IRS will make one up for you…with any indication of wins from any sources they have including your bank records and casino win/loss records, and your testimony about how often you play and how much you’ve won during any of those trips. They will probably look at everything they can for the past 3 years, not just the year in question. And guess what, they will NOT do the same for your losses. YOU are required to produce records of your losses to deduct any of them.
We are told all about Gambling Diaries and Record Keeping in Revenue Procedure 77-29. Yes, that bit of tax guidance was written almost 39 years ago in 1977. It has been interpreted in the courts, but it has not been rewritten in all that time. There are proposed changes being discussed, but no change has been made yet. Extracts from Rev Proc 77-29 can be found in IRS Publications 525 on Miscellaneous Income and Publication 529 having to do with Miscellaneous Deductions or the Revenue Procedure itself can be read on the internet. Basically you slot and table game players are expected to keep a record anytime you gamble — when and where and who you were with that can confirm what you’re saying along with supporting information like cancelled checks and ATM receipts, bank deposits and withdrawl statements, casino win/loss statements, and machine information. And it must be contemporaneous - you can’t wait until IRS asks for your diary to write up one.
If you have good records, you can deduct losses on your 1040 as a miscellaneous itemized deduction on Schedule A, but only up to the amount of your reportable winnings. If you do not have good records, you can not. So in this example with the $3,000 W2G and the $2,000 of other winnings - $5,000 total - you could claim the $1,800 in losses with good records. If you had $5,000 of winnings and $6,000 of losses, you’d be limited to $5,000 of deductions. No more losses can be deducted than the winnings you include.
Which brings us to the biggest mistake gamblers make on their returns - netting their wins and losses. It probably seems logical to you that if you won $5,000 gambling during the year, but you lost $1,800 on other trips, that when you file, you could merely report $3,200 in wins on the other income line, line 21, of your return. You’d complain about having to do it, but it would seem fair and logical to you. And with these figures, you’d never hear from the IRS (probably) or ever know you’d done anything wrong because you would have reported MORE gambling income than your W2G showed. On the other hand, if you won $5,000 gambling and lost $2,800, and you netted your wins and losses and showed $2,200 on line 21, you WOULD hear from the government because they were told you won $3,000 on the W2G and your return showed you won $2,200. Do NOT ever net yearly wins and losses. Always report all your gambling wins on line 21 of Form 1040, and if you are able to itemize, include your allowable gambling losses on line 28 of Schedule A. If you can’t itemize, well, too bad.
What does this teach us? It teaches us that whether you plan to follow the IRS reporting rules or not, if you do not report at least as much on line 21 as your W2Gs show, you’ll be in trouble for underreporting your gambling income. No maybe’s about it. If you report as much or more on line 21 as your W2G total shows, you will probably get lucky and never be contacted by the IRS because you didn’t report the rest of your income. You can decide for yourself if you are breaking the law.
It’s not up to me to make judgements. That’s up to you and your conscience. I just state the facts; you must decide for yourself what you’ll do with them.
If you are interested, there are some blog posts about taxes from last year about this time. I also have a book, Don’t Gamble with your Taxes, that you can obtain through Amazon with more examples and with tax information for professional gamblers. IRS has free publications that you can read on line or have mailed to you. The Revenue Procedures and Regulations that professional tax preparers study are also free on the IRS.gov web site. And there are a lot of people who will do your taxes for a fee, and inexpensive software you can buy to do it yourself. We have many choices when we file … Just make sure to get it done by April 15 - or file for an extension by that date if you need more time, And whatever you claim you won gambling last year, do not fail to show at least as much on line 21, Form 1040, as your W2Gs show. If you don’t, you are asking for trouble, and, believe me, it won’t be fun.
