Don't risk an audit: Know IRS rules on gambling

Feb 28, 2010 9:06 PM

Clinching the office pool for March Madness entitles the winner to a pot of money and gloating rights. Nobody can take that away, except maybe the Internal Revenue Service.

Even if winnings seem small, any money pocketed from gambling is considered taxable income. It's not likely that the IRS will come after the NCAA pot, but there are times when reporting even casual winnings becomes more formal.

Depending on how often people frequent casinos or buy lottery tickets, they might want to think about keeping a log of their gambling expenditures.

Some points to remember when it is time to file:

When winnings are reported: Casinos, racetracks and other gambling operators are required to document winnings once they reach a certain threshold.

With slot machines and bingo, casinos report any payout of $1,200 or more to the IRS. For keno it's $1,500. For poker tourneys, it's $5,000.

For horse or dog racing and lottery tickets, winnings of $600 and above are reported when they are more than 300 times the amount of the bet.

If one is lucky enough to fit any of the above scenarios, he'll be asked for a Social Security number by the venue so the winnings can be reported. That person will get a copy of the W-2G form documenting the payment before leaving.

A winner may not leave with all the winnings. Depending on the size and type of bet, the standard 25 percent federal income tax may be deducted from the winnings on the spot. A winner can request a deduction for state income tax.

If a winner declines to give a Social Security number, the house keeps 28 percent of the winnings for federal taxes.

The same rules generally apply for any noncash prizes worth more than $5,000, such as a car in a raffle. Either the winner or gambling operator is responsible for paying taxes on the prize's fair market value. If the operator pays the taxes, that is reported as income for the winner, too.

Not all gambling winnings trigger a W-2G form. It's up to the person to report smaller winnings, although one isn't audited for failing to report $100 won at a blackjack table.

As with any gambling income, such winnings can be noted on the 1040 form under "other income."

Making the most of losses: One can deduct gambling losses, but only up to the amount of the winnings. So if $1,000 is won a lottery ticket, that's as much as can be deducted in losses for the year.

Gambling losses have to be itemized, and it's not always worth deducting them.

If one's standard deduction is $5,000, for example, and the itemized deductions including gambling losses total $3,000, it's better to take the standard deduction.

The IRS might ask for documents on losses, so be ready to back up claims. The IRS suggests keeping a diary that includes:

• The date and type of gambling.

• The name and address of the venue.

• The names of anyone present at the time.

• The amount won or lost.

Also, be sure to keep any proof of wins and losses, such as W-2G forms, losing tickets, bank withdrawals or credit card statements.

If one's return is audited, the IRS may ask about any other smaller winnings or complimentary rooms or meals that the tax filer didn't report. So keeping a log is a good idea for frequent gamblers, said Jackie Perlman, a senior analyst with the Tax Institute at H & R Block.

Professional status: It's tempting to deduct travel and other gambling costs as business expenses. But just because one gambles regularly or even earns a nice chunk of money from poker tournaments, it doesn't mean that person is a professional gambler in the eyes of the tax service.

One generally is considered a professional if one gambles regularly, continuously and to earn a living. One also should be able to show that the gambling is treated like a business, and keep appropriate records, Perlman said.

If a person writes off costs as business expenses and the IRS determines that he is not a professional gambler, he could be penalized with a fee for paying too late or too little in taxes.

If a person does qualify as a professional gambler, the main perk is deducting gambling-related expenses. But that person still can't deduct gambling losses in excess of the winnings.