As the tax filing season winds down you want to make sure that you have reported all your income.  The definition of income is rather broad, going much further than whatever shows up on a W-2 or 1099, to include “income from whatever source derived”.  Included in income are gambling winnings.  This would include winnings from the lottery, racetrack, bingo, casino games and even the proceeds from the Super Bowl boards and the NCAA brackets.

If you are lucky enough you may have received a Form W-2G – Certain Gambling Winnings.  There are threshold amounts, depending on the nature of the activity, where these are required to be issued by the organization operating the activity.  If the amounts are high enough (typically $5,000) then federal income tax will be withheld from the proceeds.  The IRS does allow you to deduct your losses up to the amount of your winnings but at a cost to the lucky gambler.  The winnings are included in gross income that shows up on page 1 of your 1040 while the losses are an itemized deduction taken on Schedule A of your return.

For 2012 it doesn’t make too much difference on your Federal return as exemptions and itemized deductions are not limited for those with high adjusted gross income.  For 2013 it may be a problem if your gambling proceeds are enough to limit your exemptions, reduce your itemized deductions or subject you to higher capital gains rates or the Obama Care add-on taxes.  It is a problem with New York taxpayers, as high income taxpayers can have their itemized deduction reduced or eliminated.  

The other problem with deducting gambling losses is that you have to be able to prove the amount of the loss.  There must be adequate documentation demonstrating the amount of the loss in order for the deduction to be sustained.  Anyone who has ever even driven by a casino knows that there are more losers than winners but to be able to prove it is another matter.  Most casinos have a system to keep track of their regular customers.  This can be very beneficial come tax time, especially when determining what are actually wins and what are losses.

The fact that you received a W-2G puts the IRS on notice that you may have gambling winnings.  A day at the casino slot machines may have resulted in a few lucky turns that produced some W-2G’s but by the end of the day you walk out with no more than what you went in with.  The Internal Revenue Code states that “losses from wagering transactions will be allowed only to the extent of gains from such transactions”.  An Internal Revenue Service Chief Counsel Advice that was issued in 2008 and subsequently supported in Tax Court decisions does not treat every single play a transaction.  That approach would be close to impossible to track and as the term uses the plural the clear intent was to look at each session when determining the gain or loss from these transactions.

If, for example, you walked into a casino with $500 dollars and had some lucky turns and generated $2,500 in W-2G’s but walked out with the same $500, from a tax standpoint nothing happened – except you do have to explain away the reported proceeds.  We have been faced with IRS information matching notices in this area in the past few years.  Where our clients have been able to provide day-by-day activity, we can take the session approach and net this activity.  In some instances we are only able to obtain annual statements and while this is helpful in sustaining the amount of itemized deduction but it is not helpful in reducing gross income.  For high income taxpayers this may expose the gambling wins to state tax without the benefit of a corresponding deduction.

If your gambling is pretty much limited to the Super Bowl and the NCAA office pool and you are a lucky winner, make sure the proceeds minus the wager make it to your return.  If you frequent casinos, make sure you have documentation to support your net winnings to report on page 1 of your return and net losses to use as an itemized deduction.  As always, if you have any questions or concerns on how to properly report amounts on an IRS information return, please contact your tax professional at Dermody, Burke and Brown.

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.