Can I Deduct Gambling Losses and How Do I report it?

Most people in the office participates in a pool to play the state lottery. In our office, it is a habit of ours to play when the jackpot prize is large.

In January 2006, our group comprising of 18 people won a decent prize by getting 5 out 6 numbers in the California Super Lotto. It was one of the closest call that we had because we missed the mega number 25 – our number was 23.

The winning prize was $24,500 and each of us received a prize sum of $1,361. A federal tax of 25% was automatically withheld from our check so the net amount was around $1,020 per person. Since the lottery was organized by the State of California, we did not have to pay state taxes.

As you know, this is considered “gambling winnings” and should be reported when I file my income tax return. The question is can I deduct some of my gambling losses?

Gambling losses are deductible ONLY:

1. If you are itemizing your return. So if you are filing your tax return and you are claiming the standard deduction, then you cannot take this deduction, AND
2. Up to the amount of your winnings. If you did not win anything, then you cannot deduct any of your losses.

What types of expenses can you deduct?

There is really no limitations on type of gambling expenses you can deduct to offset the winnings. In other words, if you have gambling losses when you play the casino table, horse racing tickets, sports bets, scratchers, keno tickets, or bingo tickets then you can offset your winnings even if the winnings are not related to those types of gambling.

So in our case, even though we did not purchase $1,000 worth of lottery tickets, but if I lost $500 from the casino and another $500 in horse racing, then I can report $1,000 losses in my tax returns.

What proof  do you need to show the losses?

When claiming these losses, you need to be able to substantiate it. Horse racing tickets, lottery tickets, bingo receipts, receipts from the casino tables, ATM withdrawal receipts from the casino, etc all qualifies even if those are not related to the type of game where you won the prize. If you gamble a lot, make it a habit to keep those substantiation as you’ll never know when you’re going to win.

In our case, it was perfect that we won at the very beginning of the year so it allows us to collect lottery tickets and other gambling losses during that year.

How do you report the winnings and the losses on your return?

The correct way to report winnings and losses in your tax return is to report your winnings and losses separate. You cannot subtract the losses from your winnings and then report only the net amount.

• Winnings – must be reported on line 21 of the 1040 Schedule, which is the “Other Income” and write the “gambling winnings” on the blank line.
• Losses – must be reported on line 28 of Schedule A under “Other Miscellaneous Deductions” and write on the blank line “Gambling losses.”

What about Professional Gamblers?

Please keep in mind that a different set of rule applies to a professional gambler.

If you are a professional gambler, you can deduct your losses directly from your income.  In this case, gambling is your profession and it is treated the same way as professional athletes, actors, models, etc. These types of profession are treated like a business that has expenses and revenues.

Please keep it mind that The IRS has its own way of determining who’s a professional gambler and the definition normally are determined on a case by case basis. I’m sure that those avid gamblers want to find out how they can be considered a professional gambler. If you think you are, you should always consult your tax practitioner (CPA or an Enrolled Agent) to ensure that you do qualify as a professional gambler and you can deduct those expenses directly from your income.