For most recreational casino visitors, there aren’t many methods to reduce taxes on their winnings. If gambling is a spare-time activity, which is true most of the time, then they can’t deduct an expense – only your losses. Pro gamblers are allowed to deduct expenses, but a strict list of requirements forbids all but a small number of diehards to be treated as professional gamblers.
The only tax-reducing instrument for recreational players is a record of gambling activity. Since you can only subtract substantiated losses, you need to be able to confirm your losses in order to subtract your wins.
Keeping a record may seem unnecessary for gamblers who are prepared to get a net loss for the year. Even so, one of the charms of gambling is that the surprises can happen. For example, you take five trips a year to a nearest casino and use dollar slot machines. The first four trips are losers and regrettably leave you $3,000 in the hole. Nevertheless, on the last day of the last trip, you get three diamonds lined up and win $2,500.
In this case the IRS assumes you get at least $2,500 for the year since they received notice of the $2,500 winning as mentioned in the W-2G form. Except that you have valid documentation to prove your previous losses, you will be required to pay tax on that win, although you actually lost $500 for the year. But if you can confirm the $2,200 in losses and you are itemizing on the return, you will be allowed to avoid paying tax on that $2,500 win.
The IRS handles the issue of documentation and proper record-keeping for gamblers. However, you need to track down the following details
- Type and date of gambling event (blackjack, poker, and so on)
- Name and address of racetrack, casino or gambling venue
- Slot machine or table number where gambling took place
- The total amount you lost or won
If you overlooked to track this information, you are permitted to use losing betting stubs, credit-card cash advances, bank withdrawals, canceled checks, airline tickets or annual statements of your loss/win from the casino as additional corroboration. The proof burden rests on you as the taxpayer, so the better your logs, the better your odds of surviving an audit.
In some cases, US government doesn’t wait until the last month of the year to collect its share. The government may instantly take out withholding on any very big jackpots in lotteries or progressive slots (the threshold is usually $5,000 or higher). The withholding is thirty percent for non-U.S. citizens and twenty-eight percent for U.S. citizens. But always remember that the tax code changes often. Even when the IRS grabs a portion of your big winning right away, you still need to include that win in the tax return. The actual tax obligation can end up being lower or higher, depending on your other income and deductions. Also, some countries don’t put taxation gambling winnings, then non-U.S. citizens may be able to reclaim the money withheld.
An old joke goes more or less like this: Jack takes his annual visit to Las Vegas. His friend, David, gives Jack $400 and tells him to bet all of it on lucky number 21 at the roulette wheel. Woody dutifully gets the money and, after arriving in Sin City, he goes directly to the wheel and plunks $400 down on Number 21. Amazingly, Number 21 hits, and Woody wins $20,000. After raking in all the chips, Jack says, “Wow, that certainly was a lucky number. I think I’d better make the $400 bet on Number 21 for Dave right now.”
If you are not as ethically questionable as Woody, you at least split your winnings with your fortunate buddy. And IRS also says you can share the obligation on tax as well. Form 5754 is designed for these situations and notifies the IRS that more than one gambler actually won the prize.