BIG Tax Implications of Gambling

 

Gambling can be an exciting pastime for some, but many overlook the tax consequences. The IRS considers all gambling winnings taxable income, and recent reports indicate that such income is often underreported. Failing to report winnings accurately can result in back taxes, interest, and penalties. However, there are also legal ways to reduce your tax liability while staying compliant.

 

How to Report Gambling Income

Under federal tax law, all gambling winnings must be reported, whether they come from casinos, lotteries, raffles, horse racing, online betting, etc. Winnings aren’t limited to cash. Non-cash prizes—like cars or vacations—must be reported at their fair market value. Casinos and other gambling establishments must issue Form W-2G, "Certain Gambling Winnings" when winnings meet specific thresholds (e.g., $1,200 from slot machines or $5,000 from poker tournaments). However, even if you don’t receive a W-2G, you're still responsible for reporting your winnings.

 

Deducting Gambling Losses

You can deduct gambling losses, but only up to the amount of your reported winnings. Losses must be claimed as itemized deductions on Schedule A, and you’ll need documentation like:

• Wagering tickets

• Casino statements

• Receipts or bank records

 

If your total itemized deductions—including gambling losses—are less than the standard deduction, you must take the standard deduction and cannot deduct gambling losses. As a result, your taxable income will include 100% of your gambling winnings, with no reduction for losses.

 

For example, if you have $10,000 in gambling winnings and $8,000 in losses, but you take the standard deduction, you will pay federal tax on the full $10,000 because the losses are not deductible. However, if you itemize deductions, you can deduct losses (up to winnings), meaning you would only pay tax on the $2,000 net amount.

 

For Illinois state taxes, gambling winnings are fully taxable, and gambling losses cannot be deducted under any circumstances. So, regardless of whether you itemize or take the standard deduction federally, you must report and pay Illinois tax on the full $10,000.

 

There are Special Rules for Professional Gamblers, and qualifying as a professional gambler is difficult.

 

Don’t Gamble with the IRS

Misreporting gambling income can lead to tax penalties, while failing to deduct eligible losses may result in overpaying. If you regularly gamble, consult a tax professional to ensure compliance and maximize tax savings.

 

Tax Treatment of Comps

Casinos often provide complimentary perks like free hotel stays, meals, or event tickets. These “comps” are generally considered taxable income.

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Under U.S. Treasury regulations, any tax advice in this communication is not intended or written to be used to avoid IRS penalties. Tzinberg & Associates provides this information for general guidance only. It does not constitute tax advice, accounting services, investment advice, or professional consulting. Consult a professional adviser before making decisions or taking action, as the information is provided "as is" without any warranties regarding its completeness, accuracy, or timeliness.