The taxation of gaming is in the news again, as states prepare to tax betting platforms and as states without traditional income tax start to think about taxing gambling winnings of individuals.
Therefore, here are some reminders about taxes and gaming for individuals, starting with the federal tax regulations:
Gambling and lottery winnings are not combined to produce a net figure for taxes; winnings and losses are reported separately as follows.
Losses are only recognized if the taxpayer has receipts (e.g., losing tickets) or records (e.g., casino player records) that were created contemporaneously (at the time of the wagers, not in retrospect).
The amount of losses that exceed winnings cannot be reported. In other words, only losses up to the amount of reported winnings can be deducted.
Additionally, losses can only be reported on Schedule A, Itemized Deductions, which lists subtotals for extraordinary unreimbursed medical costs, state and local taxes, donations to charitable organizations, some casualties and thefts, and some miscellaneous items including gambling losses. However, many taxpayers don’t itemize (i.e., list) their deductions to arrive at a unique amount, but instead report a standard deduction amount as defined by the IRS for their filing status.
Gambling winnings are reported separately from losses. The winnings are reported in the income section of the Form 1040 (Schedule 1). Every taxpayer uses this form or perhaps a short version of it (Form 1040A), even if the tax return doesn’t include Schedule A, Itemized Deductions, as explained above.
By the way, the above pertains to all gambling or wagering, whether or not the activity is legal in your jurisdiction and whether or not the taxpayer won by legal means or by cheating.
Federal summary: Gambling losses are not netted with gambling winnings, and reported gambling losses cannot exceed reported gambling winnings. Depending upon the individual tax return circumstances, losses might not be reported at all. Therefore, it is unavoidable that, even though most gamblers are net losers and not net winners, occasional wins are income which must be reported as taxable income.
Many states start their taxing formulae with the Adjusted Gross Income amount from the federal Form 1040 (which is why you prepare the federal tax return before preparing the state tax return). Adjusted Gross Income does not include or account for any Itemized Deductions from Schedule A, where gambling losses are reported on the federal tax return. Therefore, in this scenario, the losses reported on a federal Schedule A don’t automatically impact the state tax return. However, it’s difficult to generalize in this matter about the 42 states* that have state income taxes; there are differences and quirks between them all, especially as to deductions.
*Tennessee, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not impose general individual income taxes, as of this writing.
Kenneth Athon Tax Strategies 