you win at the casino, get a prize in a sweepstakes, or a bet on a horse race, it doesn’t matter. The amount you won minus the amount of your wager is considered income. And income means income taxes. So, don’t assume that your gambling income is somehow tax-free. In fact, gambling income is taxed like any other source of ordinary income.
Does that mean you pay 24% tax on that win? No. Like the tax withholding on your paycheck, 24% is the share of winnings that gets withheld or sent to the IRS as a down payment on your annual income tax. If you have ever had a job that paid out a bonus, you’ll be familiar with automatic withholding requirements. What you actually owe is something you calculate at tax time.
So if you do your tax return and find your marginal tax rate is lower than 24%, the IRS will return some of those dollars back to you that the casino sent them earlier in the year. It’s also possible you’ve made so much money that your marginal tax rate is higher than 24%. That’s after exemptions, deductions, write-offs, and other accounting techniques to lower your taxes. If your marginal tax rate is more than 24%, Te Salute, Don Corleone. Just keep in mind that, unlike your paycheck, where you choose (roughly) how much is withheld, the casino has no choice in the matter. They are legally obligated to send 24% to the IRS. The government will kindly hold on to your dough until you prove you deserve some of it back next April.
For example, say you had winnings of $4,300 for the year and losses of $5,000. You may assume that the higher losses cancel out the win, so you don’t owe any tax. But when your total deductions (including your gambling losses of $5,000) are less than the standard deduction (for a married couple filing jointly, that’s $25,100), you can’t take any of those losses on your return because you aren’t itemizing. Unfortunately, you still must pay taxes on your winnings, even though you actually lost. Confused? Welcome to the crazy world of the tax code.
Unreported winnings: Don’t fool the IRS
It’s a known fact that casinos typically report some activity to the IRS — but not all. In almost every setting, the house alerts the IRS with a Currency Transaction Report by Casinos (CTRC) when a player buys in or cashes out for $10,000 or more in one day. The same is true if you make a $10,000 bet on a horse or a sporting event.
Hopeful gamblers may believe they only have to pay taxes on winnings that the casino reports to the IRS. Not true. All gambling winnings are subject to taxation, whether they come from a foreign country, the Internet, your neighbor’s poker game, a church bingo night, or a casino. Many players ignore this law, however, figuring Big Brother won’t find out about their small wins.
Counting comps for tax purposes
Comps (the free perks that casinos give to gamblers) pose a gray area in tax reporting. Technically, casino comps are income, but the government is likely to care only when you receive substantial gifts or luxury merchandise, such as an expensive watch or a new speedboat.
Few gamblers lose enough money to have casinos ship them a luxury car for Christmas. Most comps are soft — meaning the casino doesn’t incur a hard cost for them. Examples of soft costs are hotel accommodations or the dinner buffet. (Check out Chapter 20 for ways to score comps.)
Lowering your gambling tax
For most recreational gamblers, there aren’t many ways to reduce taxes on winnings. If gambling is a hobby, which is true 99.9 percent of the time, then you can’t deduct any expenses — only your losses. Professional gamblers can deduct expenses, but a rigid list of requirements prevents all but a handful of diehards from qualifying as professional gamblers.
Keeping a log may seem unnecessary for people who expect to show a net loss for the year. However, one of the appeals of gambling is that the unexpected can happen. For example, you take four trips a year to Vegas and play dollar slot machines. The first three trips are losers and leave you $2,200 in the hole. However, on the last hour of the last day of your last trip, you line up three diamonds and win $2,000.
In this scenario, the IRS assumes you won at least $2,000 for the year because they received notice of this $2,000 win from the casino in the W-2G form. If you can’t document those losses, you can’t offset the $2000 win and will have to pay income tax on it. You not only added insult to injury, you’ve possibly added insolvency as well.
Keeping a gambling log
The IRS addresses the issue of proper record-keeping and documentation for gamblers. The basic requirements include
Date and type of gambling event (poker, blackjack, and so on)
Name and location of casino, racetrack, or gambling venue
Table or slot machine number where gambling took place
Who you were with when gambling
Total dollar amount you won or lost