For gamblers, the tax code offers unfavorable odds. Win, and you owe tax at your ordinary income rate, now as high as 35%. Lose….and you lose. There is no tax benefit.

However, savvy gamblers can offset taxable winnings with their losses if they can document those losses. The better your recordkeeping, the less tax you’ll ultimately owe if you should happen to get lucky.

House rules
Casual gamblers (that is, persons not in the trade or business of gambling) should report any gambling winnings on line 21 of Form 1040 under “other income.” Those winnings include money won at a casino or race track. Lotteries, bingo, raffles, etc., are all considered gambling, so you must report any success in those areas.

Example 1: Paul Sawyer wins $1 million in the lottery, payable over 20 years. In 2012, Paul sells the rights to his future payments for $400,000. On his 2012 tax return, Paul reports $400,000 of gambling winnings. (If Paul had chosen to receive $50,000 per year, he would report $50,000 on his 2012 tax return.) According to cases such as U.S. v. Maginnis, decided by the Court of Appeals for the Ninth Circuit in 2004, money received from such a sale is taxed as ordinary income, so sellers won’t get the favorable tax rate on long-term capital gains.

You’ll also owe tax if you win a prize instead of cash. Typically, the entity awarding the prize will put a fair market value on the car, trip, or other item and report that to the IRS on Form 1099. You’ll owe tax on the reported amount. If you think the value is overstated, you can report a lower amount, but you should be ready to support your claim to the IRS, if challenged. For example, make sure you can prove you sold the “$2,000 flat screen TV” you won to an unrelated third party for $1,200 immediately after you received it.

If your losses were greater than your winnings, you cannot report the negative figure on your New Jersey tax return. You must claim zero income for net gambling winnings. For more information, see TB-20(R), Gambling Winnings or Losses. You may be required to substantiate gambling losses used to offset winnings reported on your New Jersey tax. And even if a W-2G is not issued, all gambling winnings must be reported as taxable income. Reporting and writing off gambling amounts Tell the IRS about your lucky income on line 21 of Form 1040, line 21. If reported on a W2G, enter gambling winnings on screen W2G. Otherwise, enter the total amount in the Gambling winnings field on screen 3 - Income. In Drake19, the amount of gambling winnings flows to Schedule 1, part I, line 8 and then the sum of lines 1-8 flows to Form 1040, line 7a. For example, suppose you reported $13,000 in gambling winnings on Line 21 of Form 1040. Even if you lost $100,000 that year, your gambling loss deduction is limited to $13,000.

Reporting and withholding
Tax payers are supposed to report gambling winnings, like all forms of income, in full. To help enforce compliance, the gaming establishment must report certain winnings to the IRS on Form W-2G. For example, winnings (not reduced by the wager) of $1,200 or more from a slot machine must be reported; the same is true for winnings (reduced by the wager or buy-in) of more than $5,000 from a poker tournament. In many cases, 25% will be withheld and sent to the IRS on winnings over $5,000.

Taxpayers who do not provide a Social Security number when requested may be subject to 28% backup withholding.

Regardless of whether anything was withheld, you must report all of your gross gambling winnings on line 21 of Form 1040. This is not where you net your gambling winnings and losses.

Listing your losses
In order to get any tax benefit from gambling losses, you must itemize deductions on Schedule A of Form 1040. If you take the standard deduction instead, you’ll owe tax on the full amount of your gambling winnings.

On Schedule A, you can list all your gambling losses. In effect, this will trim the tax on your gambling winnings. You can claim losses up to the amount of gambling winnings you report. Keep in mind, though, the trade-off is not perfect because gambling winnings increase your adjusted gross income (AGI), and a higher AGI may reduce your ability to claim various tax deductions and credits.

Example 2: Joan Miller reports $10,000 of poker winnings on line 21 of her 1040. On Schedule A, Joan claims $6,000 of losses from poker, other table games, and horse racing bets. In effect, Joan winds up paying tax on $4,000 of gambling winnings.

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If you had a successful night at the slots or poker tables, you're going to have to share some of the lucky proceeds with Uncle Sam. The Internal Revenue Service generally requires that you report your gambling winnings and losses separately when you file your taxes rather than combining the two amounts.

Record Keeping

As you gamble during the year, you need to keep records of your winnings and losses so that you can support whatever figures you report on your taxes. The IRS permits you to use per-session recording, which means that instead of recording whether you won or lost each time you pull the slot machine, you can simply record your total for the session. Your records should include the date and type of gambling, where you gambled and if you gambled with anyone else, such as a home poker game. If you win more than $600, you should receive a Form W-2G from the casino.

Taxable Winnings

When figuring your gambling winnings, only include the winnings from each session rather than using losses to offset your gains. You have to include gambling winnings even if you didn't receive a Form W-2G from the casino. For example, if you gambled six times during the year, winning $100, $3,000, $4,000 and $6,000 but losing $5,000 and $2,000, your gambling winnings for the year are $13,100. This amount gets reported on line 21 of your Form 1040 tax return.

Gambling Losses

To claim your gambling losses, you have to itemize your deductions. Gambling losses are a miscellaneous deduction, but -- unlike some other miscellaneous deductions -- you can deduct the entire loss. The deduction goes on line 28 of Schedule A and you have to note that the deduction is for gambling losses. For example, if you lost $5,000 on one occasion and $7,000 on another, your total deduction is $12,000.

Gambling Loss Limitation

Where Are Gambling Winnings Reported

Gambling Winnings Schedule 1

You can't deduct more in gambling losses than you have in gambling winnings for the year. For example, suppose you reported $13,000 in gambling winnings on Line 21 of Form 1040. Even if you lost $100,000 that year, your gambling loss deduction is limited to $13,000. Worse, you aren't allowed to carry forward the excess, so if you had $87,000 in losses you couldn't deduct last year, you can't use that to offset the gambling income from the current year.

• tax forms image by Chad McDermott from Fotolia.com

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