Reporting Gambling Income and Expenses

Have dreams of hitting big with the lottery or raking in a jumbo jackpot at a local Bingo game? Well, if so, be sure to wake up to the reality that gambling winnings are fully taxable and must be reported as income on your tax return.

The Virginia Society of Certified Public Accountants (VSCPA) reminds you that gambling income includes, but is not limited to, winnings from lotteries, raffles, horse and dog races and casinos, as well as fair market value of prizes such as cars, houses, trips or other non-cash prizes.

Depending on the type and amount of your winnings, the payer might provide you with a Form W-2G and may have withheld federal income taxes from the payment. Any legitimate gambling institution must report winnings over certain amounts and withhold income tax if winnings are greater than certain amounts.

For example, Bingo or slot machine winnings of more than $1,200 must be reported. Keno winnings of more than $1,500 must be reported. For horse racing, dog racing, jai alai or other wagers, winnings of more than $5,000 must be reported.

Your gambling winnings are generally subject to a flat 25 percent tax. However, income tax is withheld at the rate of 25 percent on any gambling winnings of $5,000 or more from any sweepstakes, wagering pool, lottery or any other wager where the proceeds are at least 300 times the amount bet. It does not matter whether proceeds are in cash, property or annuity form. Proceeds that are not in money are considered at fair market value. Remember that, although gambling winnings from Bingo, Keno and slot machines are not subject to withholding, you may need to make estimated tax payments to avoid underpayment penalties.

The tax withheld is reported on line 64 of Form 1040.

The full amount of your gambling winnings for the year should be reported as other income on line 21 of IRS Form 1040. You may not use Form 1040A or 1040EZ. This rule applies regardless of the amount and regardless of whether you receive a Form W-2G or any other reporting form.

If you itemize deductions, you can deduct your gambling losses for the year as other miscellaneous deductions on line 28 of Schedule A, Form 1040, but only to the extent of winnings. Therefore, your gambling loss deduction cannot be more than the amount of gambling winnings. There is no such thing as a “net” gambling loss.

Good recordkeeping is also important, particularly if you have significant gambling winnings or losses. You should keep an accurate diary or similar records of your winnings and losses which support where your numbers came from.

When it comes to deducting gambling losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

Professional gamblers can report the results of their activity on Schedule C, which is attached to their 1040. Schedule C, designed for income from a trade or business, allows for various categories of income and expense. The Supreme Court has defined a professional gambler as one who is involved in gambling on a regular and continuous basis.

And remember — there’s a reason they call it “gambling”. The odds are not always in your favor and you run the risk of losing income or savings essential for your livelihood. Be responsible. Should you or someone you love need assistance with a gambling problem, call (800 522-4700.

For more information see IRS Publication 529, Miscellaneous Deductions, or Publication 525, Taxable and Nontaxable Income, both available at IRS.gov or by calling (800) 829-3676.