With the NBA play-offs well under way, there are probably thousands of basketball fans out there who have bet money on the winning teams. But do you know that the money you win has to be claimed on your 2011 taxes? It does, and your tax professional can help you with the details.
Most everyone enjoys gambling, whether it be at a casino, a horse race, or joining the sports pool at work. The problem is that most people don’t understand how the winnings affect their tax return. Here are a couple of examples.
Twenty-five years ago, someone on Social Security could go to Las Vegas and win $50,000. And because they were on Social Security, they had not been required to file a tax return for many years. Because gambling winnings are considered added income, that senior citizen ended up having to pay taxes on their social security income, which they normally wouldn’t have had to do.
Another example is that of someone who likes to do a little gambling at the local casino after work. Over the course of the year, they win $250,000, but over the course of that same year, they end up spending more than what they had won. When tax time comes around, they don’t understand why they owe so much in taxes when they had spent more than they had won.
Your winnings from gambling are taxed a little differently than your earned income. These winnings are part of your adjusted gross income. Schedule A is where the amount you have spent is deducted. The IRS will limit what can be deducted if your adjusted gross income is too high; this also includes medical expenses, college tuition credits, child tax credits, and exemptions. The IRS records these deductions before gambling losses are ever deducted. This means that even if you only break even with your winnings, you will still lose your tax deductions, which will cost you more money.
IRS Tax Topic 419 – Gambling Income and Losses
The following rules apply to casual gamblers. Gambling winning must be reported on your tax return and are fully taxable. You must file Form 1040 and include all of your winnings, including, but is limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips. For additional information, refer to Publication 525 Taxable and Non-taxable Income.
A payer is required to issue you a Form W-2G if you receive certain gambling winnings or if you have any gambling winnings subject to Federal income tax withholding. All gambling winnings must be reported on your Form 1040, including winnings that are not subject to withholding. In addition, you may be required to pay an estimated tax on your gambling winnings. For information on withholding on gambling winnings, refer to Publication 505 Tax Withholding and Estimated Tax.
You may deduct gambling losses only if you itemize deductions. However, the amount of losses you deduct may not be more than the amount of gambling income reported on your return. Claim your gambling losses on Form 1040, Schedule A, as a miscellaneous itemized deduction that is not subject to the 2% limit.
It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses. Refer to Miscellaneous Deductions for more information.