Don't Risk an Audit: Know the Rules on Gambling

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By Candice Choi, AP Personal Finance Writer

NEW YORK (AP) — Clinching the office pool for March Madness entitles you to a pot of money and gloating rights. And nobody can take that away from you, except maybe the IRS.

Even if your winnings seem like chump change, any money you pocket from gambling is considered taxable income. It's not likely that the Internal Revenue Service will come after you for your NCAA pot, but there are times when reporting even casual winnings becomes more formal.

Depending on how often you frequent casinos or buy lottery tickets, you might also want to think about keeping a log of your gambling habit.

Regardless of whether you come out a winner, some points to remember when it comes time to file.

WHEN WINNINGS GET REPORTED

Casinos, race tracks and other gambling operators are required to document winnings once they reach a certain threshold.

With slot machines and bingo, for example, casinos report any single payout of $1,200 or more to the IRS. For keno, it's $1,500 and $5,000 for poker tournaments.

For horse racing and lottery tickets, winnings of $600 and above are reported when they're more than 300 times the amount of the bet.

If you're lucky enough to find yourself in any of the above scenarios, you'll be asked for your Social Security number by the venue so your winnings can be reported. You'll also get a copy of the W-2G form documenting the payment before you walk away.

You may not leave with all your winnings either. Depending on the size and type of bet, the standard 25% federal income tax may be deducted from your winnings on the spot. You can also request a deduction for your state income tax, which will vary depending on where you live.

If you decline to give your Social Security number, the house keeps 28% of your winnings for federal taxes.

The same rules generally apply for any non-cash prizes worth more than $5,000, such as a car in a raffle. Either you or the gambling operator will be responsible for paying taxes based on the prize's fair market value. If the operator picks up the taxes, that gets reported as income for you too.

Of course, not all gambling winnings trigger a W-2G form. It's up to you to report smaller winnings, although you won't be audited for failing to report the $100 you won at a blackjack table.

As with any gambling income, such winnings can be noted on your 1040 form under "other income."

MAKING THE MOST OF YOUR LOSSES

You can deduct gambling losses, but only up to the amount of your winnings. So if you win $1,000 on a lottery ticket, that's as much as you can deduct in losses for the year.

Gambling losses have to be itemized too, and it's not always worth deducting them.

If your standard deduction is $5,000, for example, and your itemized deductions including your gambling losses total $3,000, you're obviously better off taking the standard deduction.

The IRS might also ask you to document your losses, so be ready to back up your claims. The agency suggests you do this by keeping a diary that includes:

  • The date and type of gambling
  • The name and address of the venue
  • The names of anyone present with you at the time
  • The amount you won or lost

You also want to keep any proof of winnings and losses, such as W-2G forms, losing tickets, bank withdrawals or credit card statements.

If your return is audited, you could also be asked about any other smaller winnings or comped rooms or meals you didn't report. So keeping a log is a good idea if you're a frequent gambler, said Jackie Perlman, a senior analyst with The Tax Institute at H&R Block.

DETERMINING WHETHER YOU'RE A PRO

It's tempting to deduct travel and other gambling costs as business expenses. But just because you gamble regularly or even earn a nice chunk of money from poker tournaments, it doesn't mean you're a professional gambler in the eyes of the IRS.

You're generally considered a professional if you gamble regularly, continuously and to earn a living. You should also be able to show that you treat your gambling like a business, and keep appropriate records, Perlman said.

If you write off your costs as business expenses and the IRS determines that you're not a professional gambler, you could be penalized with a fee for paying too late or too little in taxes.

If you do qualify as a professional gambler, the main perk is that you can deduct gambling-related expenses. You still won't be able to deduct gambling losses in excess of your winnings.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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