Gambling update
(Revised November 2008)
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BEFORE ACTING
ON ANY OF THESE TOPICS, CONSULT WITH YOUR TAX ADVISOR.
Proving
Slot Machine Losses
If you are lucky enough (or you throw enough coins in) you will probably win at least one large slot machine jackpot. However, along with the cascade of coins comes an IRS Form W-G. At tax time, you will have to report these winnings on your tax return. If you don't, the IRS letter will not be far behind.
As you are probably aware, gambling losses can be deducted to the extent of winnings. In the past, the only proof that the IRS would usually accept was a diary. Recently, the IRS has relaxed its requirements - it will now accept casino records of gambling winnings and losses.
If you play often, get a casino ID card and use it every time that you play a slot machine. The slot machines are connected to a central computer that keeps track of players' activity. While the records are used primarily for promotional purposes (e.g. awarding prizes and awards to high volume customers) the records also contain information concerning daily winnings and losses. If your gambling losses are questioned by the Internal Revenue Service, you should get a printout of these daily records to prove your losses.
Unfortunately, some of the casinos do not keep these records for more than a year. Assuming that you deduct gambling losses on your 2006 tax return, you may not be notified by the IRS about proving the losses until the year 2008 or later. By this time, the casino may have destroyed the records that you will need to prove your losses. To protect your gambling loss deduction, you should contact the casino now for a copy of your gambling activity for the year.
Cross border gambling - if you win, you still lose
INDIANA will tax you - If you are an Illinois resident, and you favor the cross border Indiana riverboats, you will probably end up with some new tax filing headaches. In early 2003, Indiana announced that gambling winnings of non-residents at Indiana based riverboats and other Indiana based establishments is subject to Indiana taxes.
If you are an Illinois resident, you will be faced with an additional Indiana tax filing and a more complicated Illinois tax return. For your Indiana winnings, you will have to report the income on an Indiana income tax return. On your Illinois return, you can claim a credit for the Indiana taxes limited to the effective Illinois tax rates. While there are a number of forms and computations involved, the end result is usually paying a 3.4% Indiana income tax and claiming a credit up to 3% on your Illinois return.
Not filing an Indiana income tax return on your Indiana gambling winnings is not a good alternative. Gambling winnings of $1,200 or more are reported to the IRS, and this information is shared with the states. The reporting threshold for racetrack winnings is only $600. If Indiana catches you, you will be subject to interest and penalties. Also, by the time Indiana assesses you, it may be too late to file a refund claim in Illinois. For both Illinois and Indiana, there is a three year statute of limitations for refund claims. However, there is no statute of limitations on assessments if an Indiana tax return was never filed.
You may want to file Indiana returns for prior years. The Indiana Department of Revenue is aggressively going after Illlinois non-filers for prior years.
Indiana's new withholding rules complicate matterfs. Starting with July or 2002, Indiana requires withholding income taxes on Indiana gambling winnings exceeding $2,500. Unfortunately, you cannot claim the Indiana income tax withholding on your Illinois tax return. There is no reciprocal agreement between Indiana and Illinois. You will have to file an Indiana income tax return and then claim a credit for the Indiana taxes on your Illinois income tax return.
IOWA will tax you too If you are a nonresident of Iowa, you will generally be subject to Iowa income tax if your total Iowa income is $1,000 or more. Therefore, if your gambling winnings on the Iowa riverboats is at least $1,000 for the year, you should be paying taxes to Iowa. Also, if you hit a slot machine at the right time, you will have Iowa income taxes withheld. Iowa requires withholding when the slot machine winnings exceed $1,200.
Unlike most states, Iowa allows a deduction for gambling losses. Similar to the Federal return rules, the deduction is limited to the amount of gambling winnings reported on the tax return. However, due to the mechanics of determining the amount of deductions allocable to Iowa, you probably will not get a full deduction on your Iowa return for your gambling losses.
In many cases, the Iowa taxes on the gambling will be completely offset against the credit that you will receive on your Illinois tax return.
WISCONSIN - will also tax you on gambling winnings. In many cases where the gambling winnings are $1,000 or more, you can expect that there will be Wisconsin income tax withholding on your winnings. Gambling losses care not deductible in Wisconsin, even against gambling winnings. Also, in most cases, you will end up paying more in Wisconsin income taxes then you save on the offsetting state tax credit you can claim on your Illinois tax return.
If you still want to gamble in the border states, you will probably end up paying more in taxes. In most cases the taxes levind by the border states will exceed the allowable credit you will receive on your Illinois tax return. Since Illinois will be taxing the income anyways (as a resident all of your worldwide income is generally taxed in Illinios), you will end up with some double taxation. While the result is not far, it does not have to be.
Also, since the border tax returns are longer (and somewhat more complex than the Illinois return), your accountant will charge you more to prepare your returns. And that's fine with us; assuming that one of us is your accountant.
Now go gambling and enjoy.
Casino Prizes and Awards
Casinos give "prizes" to customers who gamble frequently. Many times, the prizes take the form of free drinks, meals or lodging. Many times, the gifts are large (e.g. cars, jewelry). Some casinos call these items "comps"
In a recent IRS internal memorandum, the Service took the position these type of "prizes" are taxable income to the gambler. In addition, the Service concluded that this additional income could not be classified as gambling income. As "gambling income", the income could be offset by gambling losses.
While the IRS internal memorandum involved a gambler who received a Rolls Royce and expensive jewelry, the rationale of this memorandum could apply to much smaller "prizes" such as free meals and drinks. As we see developments in this area, we will post them on this web page.
Your gambling habit could be a business loss
Are you a frequent visitor to the casinos, race tracks, etc.
Do you get raging mad when you get wacked on your state income tax return?
Do you have some kind of “system” you are using to improve your odds?
Are you a risk taker; are you willing to risk an IRS audit? .......and
Are you willing to pay a tax professional (hopefully me) to represent you when you are audited?
If you answer all of these questions “yes” read on, otherwise, don't waste any more time and press here to return to table of contents.
return. Even though we supposedly have a “voluntary” tax system, your winnings will be reported to the IRS for you. The boats, casinos and race tracks report your gambling winnings, over certain amounts, to the IRS. If you happen to forget to report the winnings on your tax return, you will probably receive a nasty letter from the IRS, along with a tax assessment, interest and penalties. So much for the “voluntary” system.
If you have gambling winnings, you certainly will have gambling losses. In fact, most likely your losses exceed the winnings. Unfortunately, gambling losses are usually treated differently than winnings.
You can only deduct gambling losses only to the extent you report gambling winnings.
Your gambling losses generally cannot be directly offset against your winnings. Instead, the gambling losses are treated as an itemized deduction.
Even if your gambling winnings equals your itemized deduction for gambling losses, you will pay taxes on the gambling. First, you won’t receive a tax deduction for the losses on your state income tax return. And second, the gambling winnings will artificially inflate your income resulting in all kinds of tax problems. These tax problems include losing a number of deductions. As your income increases, there are phaseout rules whereby your deductions for exemptions, itemized deductions and credits will be reduced as your income increases. Remember, gambling winnings can add a lot of income to your tax return. Second, you could end up with alternative minimum tax problems. For information on the alternative minimum tax, press here.
Now comes the good news. If you are a heavy duty gambler (and you don't have a full time job), you have an opportunity to claim your gambling activities as a business. Gambling, as a "business” activity, will allow you to offset your gambling losses (to the extent of winnings) directly against your winnings. This could result in substantial state income tax savings. Most states base the tax on the total income with no regard for itemized deductions. Offsetting your gambling losses directly against your winnings will result in lower total income.
Even if you have a part-time job, your gambling activities could qualify as a business activity. For example, in James Castagnetta, TC Summary Opinion 2006-24, the taxpayer, was a truck driver 3 days a week and spent over 250 days that year at the racetrack. The court ruled that his gambling activity sufficiently regular and contiunous to meet the requrements for a "trade or business". One factor in the taxpayer's favor was the fact that he maintained very detailed records on his gambling activities; this factor is in contrast to the Panages, supra. discussed above.
Don't bet the bank on beating the IRS on whether your gambling activities are a "business for tax purposes, especially if the gabmling involves the slot machines. To date, gamblers have been very unlucky when arguing with the IRS on whether their gambling activities can be treated as a "trade or business". We are aware of only one case where the taxpayer won. The summary Tax Court decision in Linda Myers TC Summ. Op. 2007-194, is the only case we have found where a slot machine player successfully argued for "trade or business" status. The taxpayer won in this case, even though she never kept any written records on her gambling activities; this factor was fatal in every case involving slot machine activities. The Court bought her argument that she relied on the win-loss records provided by the casinos.
It appears that the Court was impressed by the taxpayer's testimony which included the fact that she found "she found gambling to be stressful, tiring, and time consuming. She further testified that she always went to the casino alone and that no friends or family members accompanied her to add any entertainment element to her activities". While we find this case very interesting, don't bet the farm (yes, we said this before!) on trying to get the same results as a very lucky Ms. Myers. The first statement in the decision indicates that the decision cannot be relied upon as legal authority.
If you are an occasional slot machine player, you probalby won’t qualify your gambling habit as a "busness" for tax purposes. Also, if you currently have a full time job, the odds get even worse. Most taxpayers having a full time job have ending up losing on the issue of their "gambling" (even a lot of gambling) being a "business" activity for tax purposes. For example, the Tax Court decision (Panages V. Comm, T.C. Summary 2005-3), the Court held that the Taxpayer could not claim her very heavy slot machine habit as a business (for tax purposes). Even though she met a number of the requirements for a business activity, the Court held that gambling can only be a business for tax purposes if it's the primary source of income. Also, the Court noted that she did not keep detailed records on her slot machine activity. Had she kept detailed gambling records (instead of relying the the casino's win-loss records), the outcome in the decision may have been different (regardless of the facts in the Myers, supra decision discussed previously.
If this topic is of interest to you, either contact your tax advisor or usat (708) 647-1045. If you are one of my clients, send me a secure email by pressing here.