Gambling and Taxes
Many people may go to a Casino to gamble for fun, however, gambling can have major tax consequences even for the “casual gambler.”*Gambling winnings are generally included in gross income. Larger winnings are reported to the IRS and Iowa Department of Revenue (IDOR). Just because not all gambling winnings are reported to the IRS or IDOR does not mean that they are not includable in gross income.
If your winnings are reported to the IRS or IDOR and you don't claim the winnings on your tax return, it may trigger an audit. You will likely be assessed additional taxes, penalties and interest. If you receive a notice, you should have an opportunity to respond.
Consider Sally's situation:
Sally went to the casino one time in 2009. She won $10,000 at the casino but lost it all within a few hours. She cashed out her winnings at first, but returned to the tables after lunch. Sally and her husband filed a joint return for 2009. She figured she wouldn't include the $10,000 because she lost it all anyway. The IRS received a report of Sally's winnings and saw it wasn't reported on her return. The IRS says Sally owes an additional $1,000 in taxes along with interest and penalties. Sally didn't keep any record of her losses so she may have a hard time getting the IRS to allow her to use her losses.
The entire amount of all winnings has to be reported as other income on both your federal and state return. If you know how much money you spent to win the money, this is subtracted out as this is your “basis”. You can deduct losses, but in order to deduct losses you have to itemize. You cannot deduct more losses than you have in winnings. To be able to deduct your losses, you are supposed to keep track of your winnings and losses at the same time you are gambling. If you gamble with any regularity, you should keep a notebook and record each wager and the outcome. Keeping track will not only help you at tax time, but may help demonstrate that gambling isn't so good for the pocketbook or family finances. Your losses will almost always exceed your gains.
If you are playing slots or another game in one sitting and do not cash in between wagers, you may be able to report your “net” gambling amount for the session instead of tracking each and every bet made at a sitting.
Example 1: Sally put $100 into the slot machine. She won $1,000 over several hours, and kept gambling until she had nothing left. She would have a $100 loss which was the amount she put in initially. Sally wouldn’t be able to deduct the loss, but she also wouldn’t have to include the $1,000 of winnings in gross income.
Keep in mind that if your winnings and losses happen over a period of days, weeks, or months, you cannot net the winnings and losses to come up with your gross income from gambling.
Example 2: Sally went to the casino each day, she spent $10 each day for 10 days. She won some and lost some, but went home empty handed except on the last day. She won $1,000 on day 10. On day 1-9 Sally lost $90, on day 10 Sally netted $990 ($1,000-$10 basis). Sally will report $990 as other income. If she itemizes she can include $90 as a loss on Schedule A.
If you are audited and you didn't keep a wager record, you can try to recreate records. If you have a player's card with a casino it likely tracks your winnings and losses. It is important that you use the card consistently so it provides and accurate picture of your actual wins and losses. Casinos will often provide you with a print out if you ask. You are not supposed to rely upon this alone, but the IRS may accept it as evidence of your losses. You can also look at bank records to determine amounts withdrawn at the casinos. If bills are going unpaid or your bank account does not show unexplained or large balances at the same time as the winnings are reported, this may help to prove that you had losses.
You may be able to get assistance with this or other types of tax problems from Iowa Legal Aid's Low-Income Taxpayer Clinic. To apply for help, call Iowa Legal Aid toll-free at 1-800-532-1275. You can also apply online at Iowa Legal Aid Online Application. If you believe you or another family member has a problem with gambling, you can find information or help by calling 1-800-Bets Off or visiting the website www.1800betsoff.org/warning_signs
This information is not a substitute for legal advice.
NOTE: Tax rules for people who are in the business of gambling are different.