With the current Mega Millions jackpot at $1.6 billion (you read that right, billion with a B) and the Powerball at $620 million, this massive windfall can pop up in your daydreams. However, not considering the tax consequences of these and all other gambling winnings could make those dreams a little less sweet. In addition, with the Supreme Court case in May giving states the authority to legalize sports betting, knowing the ins and outs can be valuable come tax time.
- Gambling income. Gambling income includes all winnings from lotteries, horse racing, casinos, wagers, etc. It also includes cash prices and the fair market value of prizes like cars and trips (sorry, that free car you won at a charity auction will not actually be free).
- Tax reporting.
- Forms. If you win, you will receive a Form W-2G, Certain Gambling Winnings, from the payer. The IRS will also receive a copy. You will receive a W-2G depending on the games played, the amount of your winnings, if income tax is withheld and other miscellaneous factors.
- Winnings. You must report all your gambling winnings as income, even if you do not receive a W-2G. You will report these winnings as other income on your tax return, to be taxed as ordinary income.
- Losses. You can deduct your gambling losses as an itemized deduction on Schedule A. Keep in mind that deductions for gambling losses are limited to your gambling winnings. In addition, gambling losses do not need to be from the same activity to offset winnings – i.e. lottery winnings can be offset by casino losses.
- Record keeping. You should keep track of your wins and losses. This can be done through keeping a detailed gambling log containing dates, amounts, type of bets, name and address of the gambling establishment and the name of any persons present with the taxpayer. In addition, you should be keeping wagering tickets, cancelled checks and credit records.
Keep in mind, the losses must be incurred by you, so do not go around picking up losing lottery tickets from the trash. I even once read an article about a black market for losing lottery tickets to offset winnings. Remember these are tax fraud and illegal!
- Limitation on losses. Before the Tax Cuts and Jobs Act (TCJA) was passed, those in the trade or business of gambling were able to deduct reasonable business expenses against adjusted gross income, which was not subject to the gambling income limit. However, under the TCJA, the losses from wagering transactions no longer only include the cost of wagers but also all other expenses incurred related to gambling – i.e. traveling to and from casinos. Thus, all gambling expenses are now limited to gambling winnings, and any excess losses will not be carried forward.
- Additional considerations. If your gambling activities do rise to the level of being considered a trade or business, you may be able to take advantage of the Section 199A deduction (read up on that here, here, here and here). However, it is still unclear as to whether gambling can qualify for this deduction.
If you have any questions, do not hesitate to reach out to your Henry+Horne CPA.
Daniel J. Colonna, CPA