Comeon Lady Luck
Last week, while Marty was in California, Janie Abo won another one of her "sweepstakes" entries. Featured on Fox News for winning Snyder's Pretzels. She won roundtrip airfare for two to Charlotte, NC, five star hotel with all kinds of goodies/amenities, a private training lesson with Jay Bilas and a chance to shoot a half court basket for $100,000. She had a blast and, while she didn't make the shot....what a ride....
Anyway, with that backdrop, we thought it might be a good time for a refresher on the tax rules for gambling, prizes and other games of "chance". If you've won some raffles or prizes yourself lately or done some gambling, it's important to understand the federal income tax treatment of gambling winnings, losses, and expenses.
Amateur Gambler's Winnings. You must report 100% of your prize or wagering winnings on page 1 of Form 1040. They are subject to your regular federal income tax rate. If you itemize deductions, you can write off wagering losses on Schedule A of Form 1040. However, as we'll discuss later, allowable wagering losses are limited to your winnings for the year.
Multiyear Payments. If a cash-basis winner of a qualified prize from a lottery, contest, or jackpot has the option of receiving multiyear payments instead of a lump sum, the multiyear payments may not have to be taxed until the years they are received. When we assisted a pretty substantial lottery winner a few years back, we found this to be an especially taxpayer-friendly exception to the general constructive receipt rule that might require the entire amount to be taxed in the year of the win. Alas, the courts have repeatedly rejected the idea that proceeds from selling the right to receive future lottery payments can be classified as capital gain income-so shelve any temptation to make that argument. It's a loser, so to speak.
Allowable Deductions. An amateur gambler's total losses can only be claimed as a miscellaneous itemized deduction on Schedule A. Losses for the year cannot be netted against winnings for the year with only the net figure reported as gross income on page 1 of Form 1040 (see our earlier comments of how to report gambling winnings). Amateur gamblers who don't itemize cannot claim any gambling loss deductions. Sorry!
In addition, the itemized deduction for gambling losses is limited to the amount of gambling winnings. Any excess losses for a year cannot be carried forward. They go up in smoke. On the plus side, the itemized deduction for gambling losses is not subject to the 2%-of-AGI floor that applies to some other miscellaneous itemized deductions.
To our knowledge, there is no requirement for losses to be from the same types of gambling activities as winnings. For example, slot machine losses can be deducted against poker winnings or raffles, subject to the losses-cannot-exceed-winnings deduction limitation. Finally, when winnings are received in multi-year installments and taxed in the year of receipt, each year's installment counts as winnings for purposes of applying the losses-cannot-exceed-winnings deduction limitation for that year.
The IRS and the Tax Court agree that only the cost of an amateur gambler's actual wagering transactions are considered gambling losses. Out-of-pocket expenses for transportation, meals, lodging, and so forth do not count as gambling losses and, therefore, cannot be written off. Such outlays are considered nondeductible personal expenses.
Form W-2G Helps Keep Winners Honest. For most types of gambling at a legitimate gaming facility, you will be issued a Form W-2G (Certain Gambling Winnings) if you win $600 or more and that amount is also more than 300 times the amount wagered. Of course, the IRS gets a copy too! However, higher tax reporting thresholds apply to winnings from slots and bingo ($1,200), keno ($1,500), and poker tournaments ($5,000). Since the IRS gets a copy of Form W-2G, you had better make sure that the amount of gambling winnings reported on page 1 of Form 1040 at least equals the total of the amounts reported on Form W-2G. When winnings exceed $5,000, federal income tax withholding is generally required, but not for winnings from slots, bingo, or keno.
Documenting Gambling Losses. IRS guidelines tell us that you really should adequately document wagering losses (and out-of-pocket non-wagering expenses if you are a pro) to keep the IRS happy. The government says you should compile the following information in a log or similar record:
The date and type of specific wager or wagering activity.
The name and address or location of the gambling establishment.
The names of other persons (if any) present with you at the gambling establishment. (Obviously, this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor.)
The amount won or lost.
If you qualify as a professional gambler, your wagering winnings and losses are reported on Schedule C of Form 1040. However, deductions for wagering losses are limited to your winnings, and any excess wagering losses cannot be carried over to future years (same as for amateurs). You may also be able to deduct travel expenses and other out-of-pocket costs of being a professional gambler.