Most people who gamble assume that they can use their gambling losses as write-offs, which is simply untrue. You need to know that gambling losses are tax deductible to the extent of your winning limitation. The limitation is applicable to all types of gambling, including slots, poker, lottery, and horse racing, among others. It’s also worth mentioning that you can’t reduce your tax burden by showing your gambling losses by claiming the standard deduction.
The purpose of this post is to help you learn about the ways to deal with tax liability changes that manifest from gambling.
Gambling Loss Deductions Limit
All gambling losses are tax deductible to the limit of your winnings in a particular year. If, for instance, you win $2500 and lose $4000, your deduction is limited to $2500, and you can’t write off the remaining amount ($1500). The deduction for your losses is available only if you are eligible to itemize your deductions. In addition, you need to report all the money you have won as taxable income on filing your return.
Record Your Winnings and Losses
The Internal Revenue Service (IRS) specifies that gamblers need to keep records of winning and losing amount to claim their rightful loss deductions. The information they require includes:
- The date and type of gambling activity.
- The name and address of the gambling place.
- The names of other persons, who took part in gambling wit you, and
- The amount you won and lost.
Other documents to prove your losses comprise:
- Form W-2G
- Form 5754
- Canceled checks or credit records
- Wagering tickets, and
- Receipts from the gambling facility.
Those who gamble must keep all the records of their winnings and losses, and should be able to submit the mentioned documents to deduct the latter.
Report Your Gambling Losses
You should be eligible to itemize your income tax deductions on ‘Schedule A’, before reporting your gambling losses. To be eligible for itemized deductions, your gambling losses, along with other itemized expenses, should be greater than the standard deduction. If you claim the standard deduction, however, you may end up getting no benefit from gambling losses even though you are technically eligible to claim them.
Owe Taxes on Winnings Before Deducting Losses
The IRS never allows you to simply subtract your gambling losses from your winning amounts, and report your net profit or loss. You can’t deduct your gambling losses without reporting the winnings. It means, first you need to owe tax on gambling winnings before deducting the lost amounts.
Conclusion
Gamblers need to know how to claim gambling losses as tax deductible. This knowledge, however, may not be enough at times. It is, therefore, ideal to consult an IRS tax attorney, who can help you resolve all types of IRS problems. Should you wish to learn more or have any questions, feel free to connect with one of our experts for a no-obligation free consultation.
