Can You Deduct Gambling Losses On State Taxes

Published 7:31 PM EDT Mar 24, 2019

How To Claim Gambling Losses
Can You Deduct Gambling Losses On State Taxes 2016

If you're betting on the March Madness basketball tournament — or other sporting events — probably the last thing on your mind is taxes.

Gambling losses are indirectly deductible on your income tax return in the state of Wisconsin. While you don’t claim them on your actual Wisconsin income tax return, you do claim them on your federal income tax return by itemizing deductions, for which you receive a credit on your Wisconsin state income tax. For starters, you can only deduct losses up to the amount of your winnings, so any excess loss can’t offset other highly taxed income. Conversely, you might show a taxable profit. Suppose you have annual gambling winnings of $10,000 for 2017 and losses of $2,500. Dec 18, 2018 For federal you would report the income and deduct the losses on Schedule A; very little additional tax, if any, would result on the federal tax return. Gambling wins reported on Form 1040 can cause other serious tax issues even if you can deduct losses on Schedule A. Mar 24, 2019 As noted, the IRS requires that you maintain records of your gambling activities if you hope to deduct losses. Deductible gambling expenses include travel expenses to or from a casino. Gambling winnings also are subject to taxation by states that impose income taxes. If you lose money gambling, you might be able to deduct it on your tax returns. However, before you can claim the deduction, you'll have to meet two important requirements. First, the IRS will want you to itemize all of your deductions. Second, you can only deduct gambling losses to the extent that you have gambling winnings.

But taxes are relevant to gambling — and that increasingly will be the case as legal gambling spreads across the nation following a Supreme Court decision last year that gave states the green light to legalize, and tax, sports betting.

March Madness could be the largest sports-betting activity all year, with the American Gaming Association predicting 47 million people will bet a combined $8.5 billion, or 40 percent more than the public wagered on the Super Bowl.

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Most of the March Madness winnings probably won't be declared for tax purposes, though it should be.

'All income is taxable unless it's excluded,' said Mark Steber, chief tax officer for Jackson Hewitt Tax Service. 'Winnings aren't excluded.'

The federal tax rules on gambling haven't changed much in recent years and weren't significantly altered by tax reform in 2017. The main provisions are:

Winnings are fully taxable and should be reported on your federal return. Gambling income includes money received from lotteries, raffles, horse races and casinos. It includes cash winnings and the fair value of prizes such as cars or vacations.
The casino or other entity paying the prize is supposed to issue you a W-2G form, especially for larger winnings. You also might be subject to federal tax withholding on larger amounts and required to pay estimated taxes.
You may deduct gambling expenses if you itemize deductions — provided that the amount of these deductions doesn't exceed the gambling income or winnings that you claim. In other words, you can claim losses up to the amount of winnings. To deduct losses, as with other expenses, you must keep records including receipts, tickets or statements, along with an accurate diary or log.
You can't reduce your gambling winnings by your gambling losses and report the difference. Rather, you report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. Winnings are reported as 'other income' on Schedule 1 of Form 1040.

According to an example provided by TurboTax, if you win $5,000 this year but lose $8,000, you may deduct only $5,000. You can't deduct the remaining $3,000 or carry it forward to future years.

READ MORE: New poll finds 47 million Americans will place bets, many taking Duke

Records and taxes

As noted, the IRS requires that you maintain records of your gambling activities if you hope to deduct losses. Deductible gambling expenses include travel expenses to or from a casino.

Gambling winnings also are subject to taxation by states that impose income taxes. This means that if you win while traveling, you could face taxes in that state and those imposed by your state of residence (though double taxation wouldn't apply as the home state likely would provide a credit for taxes collected by the other, Steber said).

Whether you receive a W-2 depends on how much you win, what type of gambling you engage in and how sophisticated the organizing entity is, he said. If you win $50 in an office basketball pool, it's pretty likely nobody will issue you a W-2.

Of the estimated $8.5 billion in March Madness gambling, the American Gaming Association estimates $4.6 billion will be wagered in informal March Madness brackets. It's questionable how much of the winnings from those competitions will be declared, and thus, taxed. So too for the money that Americans will wager with friends or bookies and through online websites, mostly offshore ones.

How tax reform could matter

One tax reform-related change relevant to gambling is this: Because you must itemize gambling losses, it won't help if you don't have sufficient overall deductions to qualify for itemizing.

With the increased standard deduction from tax reform, fewer Americans will be able to itemize. The new standard deduction amounts are $12,000 for singles and $24,000 for married couples filing jointly.

'If you don't itemize, you won't get the benefit of gambling deductions,' Steber said.

He described the tax rules tied to gambling as somewhat mysterious and confusing to the general public, perhaps partly because most people don't often win thousands or hundreds of thousands of dollars (or more).

But when they do win big, taxpayers would be wise to seek professional tax guidance, he said.

'You won't hear much about all this if you're playing for a $100 bingo prize, but the rules are still the same,' Steber said. 'If you win, you owe, and if you don't declare the winnings, you face some risk' of hearing from federal and state tax authorities later.

Sports betting trends

The taxation of gambling is more relevant following last year's Supreme Court decision in Murphy v. the NCAA, which made it easier for states to legalize and tax sports betting.

Since then, eight states have authorized and implemented sports betting, while it has been approved but isn't operational yet in three other states and the District of Columbia, according to the American Gaming Association.

Legal sports betting is under consideration in 23 other states, including Arizona. The association has a state-by-state gambling map showing what's happening where.

Meanwhile, 63 percent of Americans support the Supreme Court's decision to strike down what had been a federal ban on sports betting, according to a survey released by the American Gaming Association. But only 23 percent of respondents think professional sports leagues should be able to take a share of any betting revenue, according to the poll.

The American Gaming Association estimates that Americans wagered roughly $1 billion in legal sports betting markets in January, spread across Nevada and six Eastern and Southern states. Nevada (primarily Las Vegas) accounted for slightly less than 50 percent of the total — the first time it has taken less than half.

In other words, a slight majority of all sports betting took place in legal markets that didn't exist a year ago, the association noted. New Jersey was the second biggest state after Nevada for sports gambling, by a comfortable margin.

How To Claim Gambling Losses

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

Published 7:31 PM EDT Mar 24, 2019

If you lose money gambling, you might be able to deduct it on your tax returns. However, before you can claim the deduction, you'll have to meet two important requirements. First, the IRS will want you to itemize all of your deductions. Second, you can only deduct gambling losses to the extent that you have gambling winnings.

Claiming the Gambling Deduction

The way that you claim the gambling deduction is relatively simple. First, you have to file Schedule A and itemize your tax deductions. This means that you can't claim the standard deduction, but you can write off expenses like your state income tax, mortgage interest, property taxes, car registration tax and charitable donations. If you have gambling losses, you write them off as 'other miscellaneous deductions' on line 28 of Schedule A, where they get combined with your other itemized deductions to reduce your taxable income.

Deduction Rules

The IRS will only let you deduct losses to the extent that you win. For instance, if you lose $3,000 on one trip to the casino and win $2,100 on another trip in the same year, you can write off $2,100 in losses to offset the $2,100 in winnings, leaving you with a total of $900 of taxable gambling income. If you lost $1,000 on one trip and won $9,500 on another, though, you could claim the entire $1,000 in losses to reduce your net income from gambling to $8,500.

Proving Your Gambling

If you claim a gambling loss deduction, you will have to prove that you are entitled to it. Casinos send a form W-2G when you win to let the IRS know that they paid you, but it's up to you to establish your losses. The IRS requires you to keep tickets or receipts and a diary of your winnings and losses to substantiate your deduction. If you can get a printout from the casino of your gambling activity, such as if you use a player's club card, it may be helpful.

Professional Gambling

The rules for professional gamblers are different. A professional gambler makes a business out of gambling. He can write off his gambling losses and any expenses that he incurs for gambling -- like travel -- to offset gambling income. Since gambling is a business, he would file a Schedule C to report his income and expenses and would also have to pay self-employment taxes on his profits.

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