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Can You Claim Gambling Losses on Your Taxes

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Can You Claim Gambling Losses on Your Taxes?

 

Claiming gambling losses

Gambling losses are indeed tax deductible, but only up to the amount of your winnings in that year.  You MUST report ALL the money you win as taxable income on your return. The deduction for gambling losses is only available if you itemize your taxes.   If you claim the standard deduction because it is better for you, then you can't reduce your tax by your gambling losses.

 

Keeping track of your winnings and losses

The IRS requires you to keep a log of your winnings and losses as a prerequisite to deducting losses from your winnings. Your winnings include each win during the year.

You typically cannot offset your winnings from one day with your losses from another day in order to report your net winnings or losses. Your winnings and losses typically need to be separated and reported individually.

The IRS does allow you to net your wins and losses on the same day for the same type of wagering if you meet certain requirements. This is known as session gambling and has very specific requirements and documentation.  This means that if you win at the slots one day and lose the next day, you have to report the winnings on your tax return as income and then deduct the losses separately as an itemized deduction. 

Typical sources of winnings and losses can include:

  • lotteries
  • raffles
  • horse and dog races
  • casino games
  • poker games
  • sports betting

Your records need to include:

  • the date and type of gambling you engage in
  • the name and address of the places where you gamble
  • the people you gambled with
  • the amount you win and lose

Other documentation to prove your losses can include:

  • Form W-2G
  • Form 5754
  • wagering tickets
  • canceled checks or credit records
  • receipts from the gambling facility

 

Limitations on loss deductions

The amount of gambling losses you can deduct can never exceed the winnings you report as income. For example, if you have $5,000 in winnings but $8,000 in losses, your deduction is limited to $5,000. You could not write off the remaining $3,000, or carry it forward to future years.

 

Reporting gambling losses

To report your gambling losses, you must itemize your income tax deductions on Schedule A. You would typically itemize deductions if your gambling losses plus all other itemized expenses are greater than the standard deduction for your filing status. If you claim the standard deduction, you:

  • are still obligated to report and pay tax on all gambling winnings you earn during the year
  • will not be able to deduct any of your losses

 

Only gambling losses

You can include in your gambling losses the actual cost of wagers plus other expenses connected to your gambling activity, including travel to and from a casino. Keep in mind that the IRS does not permit you to simply subtract your losses from your winnings and report the difference on your tax return. And if you have a particularly unlucky year, you cannot just deduct your losses without reporting any winnings. If the IRS allowed this, then it's essentially subsidizing taxpayer gambling.

The bottom line is that losing money at a casino or the race track does not by itself reduce your tax bill. You must first report all your winnings before a loss deduction is available as an itemized deduction. Therefore, at best, deducting your losses allows you to avoid paying tax on your winnings, but nothing more.

Some states do not permit amateur gamblers to deduct gambling losses as an itemized deduction at all. These states include Connecticut, Illinois, Indiana, Kansas, Massachusetts, Michigan, North Carolina, Ohio, Rhode Island, West Virginia, and Wisconsin. A taxpayer who has $50,000 of gambling winnings and $50,000 of gambling losses in Wisconsin for a tax year, for example, must pay Wisconsin income tax on the $50,000 of gambling winnings despite breaking even from gambling for the year.

In these states, session gambling may become particularly important.

Because professional gamblers may deduct gambling losses for state income tax purposes, some state tax agencies aggressively challenge a taxpayer's professional gambler status. A taxpayer whose professional gambler status is disallowed could face a particularly egregious state income tax deficiency if the taxpayer reported on Schedule C the total of Forms W-2G, Certain Gambling Winnings, instead of using the session method under Notice 2015-21. In this situation, the state may be willing to consider adjusting the assessment based on the session method if the taxpayer provides sufficient documentation.

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