E. Martin (Marty) Davidoff, Partner-in-Charge of the National Tax Controversy Practice for Prager Metis, a top international advisory and Top 40 accounting firm, spoke with Compare.bet’s Kyle Odegard about how gambling taxes work in the US, what gamblers should be aware of, and how to keep things above board on your tax returns.
KO: What are some of the most common mistakes gamblers make when filing their taxes?
MD: Most frequently they fail to report all of their winnings. When this happens, the IRS matching system will list the winnings but not allow the losses as itemized deductions. Not tracking all itemized deductions is another common mistake. One can deduct gambling losses as an itemized deduction if they itemize. To get over the threshold between the standard deduction and the benefit of itemizing, keeping track of other itemized deductions (e.g. charitable contributions, mortgage interest, medical expenses, etc.) will increase the benefit of the gambling losses being deducted. This information can be secured through their online or in-person gambling establishments via their win/loss reports.
KO: Should gamblers be keeping track of their winnings/losses throughout the year?
MD: Absolutely. It is your responsibility to keep records and report all your gambling winnings. If you are a frequent gambler, you should maintain good records and work with your tax advisor/preparer on the proper reporting.
KO: What are other best practices?
MD: My advice is that people first start to have good records going forward so that they do not repeat the problem. Next, they should go and get the “win-loss” statements from the venues that they gambled in most frequently, then check any other records, bank accounts, etc. that they have. Note, “win-loss” records will work for slots and other “tracked” activities. They won’t work for table games (e.g. blackjack, craps, poker, etc.).
KO: What tax reforms would you like to see?
MD: Gambling is not taxed like normal business income. Generally, subject to detailed regulations which allow offsets for winnings and losses in a single session, one may not offset losses against winnings. Winnings are reported and losses (up to winnings) may be reported as itemized deductions only if you itemize. Congress should allow netting, in my mind. Note, if one goes each Saturday and Sunday to gamble in Atlantic City and always win $100 on Saturdays and lose $100 on Sundays, they have won $5,200 and lost $5,200, so one might think they owe no taxes. Wrong. They report $5,200 of income and for most people who do not itemize they get no benefit from the losses. Congress needs to change the law to allow offset of winnings and losses overall. This will simplify reporting by taxpayers and come up with a fairer result.
KO: What happens if gamblers don’t claim their winnings and losses?
MD: If they do not report their winnings, they are intentionally violating the law. That is a crime. For larger amounts, they risk prosecution. For smaller amounts, the IRS would most likely send a notice assessing the tax, interest, and penalty.
KO: Can gamblers go back and make changes to prior tax returns?
MD: Yes, up to three years after the original (as extended if extended) due date.
KO: Anything else important for new gamblers to know?
MD: Keep careful records and use a professional tax preparer familiar with the rules on gambling. Also, as a group, lobby Congress for the tax reform idea above.
