You may win at tables, lose on taxes BY HOWARD MCEWEN | ENQUIRER CONTRIBUTOR
CRESCENT SPRINGS – This tax season, winning gamblers are learning that they might be able to beat the casino, but the IRS holds all the cards.
John Freeman and Jennifer Gatherwright, attorneys with Gatherwright, Freeman and Associates Law Firm in Crescent Springs, work with clients who learn this the hard way. Freeman said a range of problems can arise from winning – from being overtaxed, losing tax deductions and exemptions, to a loss of Social Security and Medicaid benefits. “Planning is everything with tax issues and this includes gambling matters,” said Freeman, a former IRS employee.
Freeman cites a recent statistic from the American Gaming Association: Indiana trails only Nevada in the amount of local and state tax revenues generated by its casinos.
“If you’re one of those who use the local casinos as a source of entertainment, hoping to win the big bucks in a mega-jackpot at the quarter slot machines, you should also be aware of the tax consequences,” said Gatherwright. Freeman and Gatherwright said the first problem is with how the IRS defines income.
“The term ‘income’ includes all gambling winnings,” said Freeman. “Individuals are not allowed to report only their net winnings. Wins and losses are separately reported and the losses are only allowed to the extent of winnings.” Gamblers are taxed on net winnings but can’t deduct net losses. Winnings are included in income on the first page of a tax return, but gambling losses are part of itemized deductions. If gamblers don’t itemize, they don’t get to deduct any losses.
A major problem is the IRS record-keeping requirements, said Freeman.
“It is conceivable,” said Freeman, “for an unwitting gambler to win $100,000 one night, lose it all the next night and owe taxes at the end of the year on the $100,000 winnings. When gamblers win over $1,200, the casino issues them a W-2G, which reports the earnings to the IRS. When gamblers lose, they – not the casino – are responsible for keeping the records to the IRS’ liking.”
Keeping those records isn’t so easy for players to do.
“Guidance on the kinds of records the IRS expects you to maintain is provided in a longstanding procedure published as Rev. Proc. 77-29, counseling taxpayers to maintain an accurate diary identifying the date and type of wagering activities, the name of the gambling establishment, the address of that establishment, the names of those who accompany you to the establishment, and the amounts won or lost.
“Believe it or not, it requires that a gambling diary must be kept to encompass each spin of the roulette wheel and each hand dealt at the blackjack table.”
Slot players may have it a bit easier. Players’ cards – cards inserted into slot machines to record a player’s bets and allocate free gifts known as comps – automatically track a gambler’s wins and losses. They simply have to ask the casino for a report.
“If you don’t use a player’s card to substantiate your losses, you may be ‘shooting craps’ when it is time to offset your winnings with losses,” said Gatherwright.
For gamblers on Social Security, their winnings may trigger taxes on their monthly checks. The IRS taxes married Social Security recipients who have benefits with an annual gross income above $32,000. Those on Medicaid have a harder challenge, as those benefits are means tested every year. A lucky night at the boats may artificially inflate their income, even if they have gambling losses, and could cause their benefits to be phased down or be taxable.
“Is there any way to avoid the loss of these benefits?” asked Freeman. “No. It’s just the cost of winning.”