In the last thirty years, gambling has changed its image from a quasi-legal activity to a major player in the economy. The IRS has responded accordingly, now requiring gambling winnings to be reported as a source of income, with losses deductible only to the extent of winnings. A professional gambler, or someone who gambles often would especially need to be mindful of gambling taxes. (IRC section 165(d).) (If you win a prize in a drawing, that does not count as “gambling.” It is reported on 1099-MISC, and other rules apply.)
Do you have to pay taxes on gambling winnings?
If you are fortunate enough to win $1200 in a jackpot at a slot machine, $1500 from keno, $5000 from a poker tournament, or $600 or more from “other” gambling winnings, then the casino will record your Social Security Number and the amount of the win, and write it off as an expense. Casinos offer a win-loss statement for their slot players that itemizes coin-in and coin-out, but vary in their player-tracking policies for other types of play. The casino will give you a copy of the gambling win, on Form W-2G and send a copy to the IRS. The IRS will use this gross figure as increased ordinary income unless you can indicate losses against this win. Senior citizens beware: the amount indicated on line 21 of Form W-2G will potentially make more of your Social Security benefits taxable!
Can you claim gambling losses on your taxes?
The traditional place to declare gambling losses is on Schedule A under miscellaneous deductions, but there are problems with doing it this way. First, you must “qualify” to itemize deductions on Schedule A. For Schedule A to do you any good, your deductions must be greater than what you would receive as the standard deduction.
Let us say that you are single, so your standard deduction for 2014 is $6,200. If your allowable itemized deductions total less than this amount, then filing a Schedule A won’t benefit you. However, if you have sufficient mortgage interest, real estate taxes or charitable contributions to justify itemizing your deductions, then declaring a $1200 loss on Schedule A will help to offset the $1200 win.
If you don’t qualify for a Schedule A, or if you want to report less than what appears on line 21 of Form W-2G , then you have significantly more bookkeeping to do. All winnings, not just W-2G winnings, are reportable. Therefore, you must maintain a day-to-day diary that itemizes ALL of your winnings and losses per session, not just amounts of $1200 and over. The diary, similar to a tip diary, must be credible. It’s a good idea to back it up with bank records, ATM slips, and casino win-loss statements.
If you travel to gambling resorts once or twice a year, be prepared to keep a log of your winnings and losses per trip. As you arrive at your resort or hotel, make a dated note of your “buy in”, the amount of cash that you brought along to play with. When you check out of the hotel or resort, make a note of your “win” (or loss). This is considered the end of your gambling session.
If you live in a gambling city such as Reno or Las Vegas, then there is technically no way to delineate a gambling session, since slot machines are available in supermarkets and convenience stores 24 hours a day, as well as in bars and restaurants. If you are reporting less than the amount of winnings reported on Forms W-2G, be prepared for an IRS letter or an audit, and have all of the records required for a day-to-day record of wins and losses. You should also be aware of various state laws that may vary from federal requirements. In such cases, it’s a smart strategy to have a tax professional assist you with the reportable figure. This option will require conforming to the situation in the court case Shollenberger v. Commissioner T.C. memo 2009-306, as referenced in The Tax Book, by Tax Materials , Inc.
Don’t expect casinos to proactively withhold any portion of your winnings for tax purposes unless state law requires it. Most state laws do not. Exceptions include foreign winners or other special circumstances.
There are two obvious reasons casinos won’t voluntarily place tax withholdings on your gambling winnings:
- Withholding creates added administration paperwork
- Withholding disrupts the flow of business (if the money is withheld, then you won’t lose it back)
You can request that gambling taxes be withheld from your winnings (perhaps based on your marginal tax rate or higher) at the time of the payoff. But you should not request withholding if your winnings come from the casino where you work. (Some states and casinos allow casino workers to gamble where they work; others do not.) However you go about doing so, having tax withholdings from gambling winnings can potentially save you hundreds or even thousands of dollars at tax time.
Every year like clockwork you conscientiously pay your state income taxes, but this year you spaced and missed the deadline. Don’t panic. Unless you neglect to file AND pay for years, it is unlikely that you’ll wind up as an extra for Netflix’s Orange Is the New Black. But you’ll need to get your act together now to minimize the potential damage.
Are You Sure You Have to File?
If you live and work in any of the following states, you are not required to file an income tax return or pay state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two more states, New Hampshire and Tennessee, also exempt wage earners from paying state income taxes, although interest and dividend income is taxed. But if you live or work in any of the other 41 states or in the District of Columbia, you may be subject to late filing fees, late payment fees or both. (PriorTax)
How to Get a State Tax Extension
Your state’s official website is likely to have information available on filing state tax returns after the deadline. If you cannot find the information online, contact your state’s treasury or tax office by telephone. Be prepared to answer general questions about your income and filing status, because your answers may have a bearing whether you actually must file. For instance, many states exempt taxpayers who owe no state taxes from the requirement of filing a return. But you will forfeit any refund or tax credits you might otherwise have received if you do not file a return.
Were You Granted an Automatic Extension?
Some states grant taxpayers an automatic extension of time to file if they filed an extension request with the IRS on or before the tax deadline. Other states require a separate extension request even if you filed a federal request. Again, consult your state’s official website or place a telephone call to the appropriate agency to obtain the information that you need.
State Tax Amnesty Programs
Like the IRS, many states have adopted a cooperative attitude toward taxpayers who make honest mistakes. Some states have tax amnesty programs or otherwise eliminate or minimize penalties for taxpayers in arrears who voluntarily come forward. If you just straight up forgot to file, or didn’t file because you didn’t have the money, come clean with the proper authorities. Often, the state will work with you to develop a payment schedule that you can live with to bring you back into compliance.
What Do I Do Now If I Forgot to File State Taxes?
File your state taxes ASAP. If you forget to file your return until a few weeks or even a few months after the deadline, don’t panic. There is only the slimmest chance that you will ever face criminal charges. But that doesn’t mean that you should dawdle. Tax penalties imposed by the state can often rival those of the IRS, including liens and levies against your paycheck and assets or even possible jail time. The sooner you file, the quicker you can stop the clock on penalties and interest charges.
If you are missing Form W-2 or other tax records that you need to file a return, you can often obtain the information you need immediately through the IRS website. In some cases, you may need to make a request by telephone or regular mail, which will require extra processing time. Inquire with your secretary of state’s office or tax office if you need blank tax forms. Don’t just assume that you can file the same form as you would have if you had filed your return on time.
Don’t Assume You’re in the Clear
Honest taxpayers act as quickly as possible to file their returns after they have realized that they somehow forgot to do so. But some may decide that since they have managed to get away with not filing a return or paying taxes that they will continue to flout the law. Don’t make that mistake. If your state income tax authority concludes that you intentionally evaded paying taxes, you could have the book thrown at you – including time behind bars.
The bonus depreciation tax break allows businesses to deduct up to 50% of the cost of capital purchases upfront, resulting in big tax savings for business owners. In May 2014, the Ways and Means Committee of the Republican-controlled House of Representatives voted 23-11 – along party lines – to renew and make permanent the tax break designed to encourage corporate business investment.
A Tax Break with a Deficit
But making the depreciation tax break permanent would add nearly $300 billion to the deficit over the next ten years, according to the Wall Street Journal. A measure to make corporate research credits permanent would increase the deficit by another $300 billion. Enacting all the corporate-friendly tax measures proposed or passed by the House would extract approximately $1 trillion from the economy. Despite these added costs to the budget, the sentiment in the House is that business owners need certainty about future tax regulations in order to feel confident about making capital investments.
Related Article: Should We Abolish Corporate Income Taxes?
A Fate Less Certain
The permanent extension of the corporate capital deductions bill is scheduled for a vote by the full House, where it is expected to pass, most likely along party lines as well. But the ultimate fate of the corporate depreciation tax credit is somewhat less certain. A version of the corporate depreciation tax credit bill under consideration in the Democratic-majority Senate limits the extension of the credit to two years. Scheduling a Senate vote for its version of the bill is also being weighed down by partisan battles concerning a number of related and unrelated issues.
The differences between the bills means that the two would have to be reconciled before they could be sent to President Obama’s desk for his signature or veto. It is not known whether President Obama would sign the measure if it passed Congress, although he did sign a similar measure in 2010 that allowed businesses to apply an accelerated rate to deductions for capital expenses on their 2010 federal income tax returns.
Renewing Expired Tax Breaks
In a typical year, Congress passes numerous pieces of legislation designed to renew or extend temporary tax measures that have expired recently. Even in the hyper-partisan atmosphere of the present Congress, many expired tax measures are expected to be renewed eventually. This includes the corporate depreciation deduction. But given that 2014 is an election year, some observers believe that no significant legislation will be passed until after November, when a lame-duck Congress will be at least temporarily freed from the pressures of campaigning.
Related article: 9 Tax Breaks That Could Expire in 2014
The Treasury Department has a well-earned reputation for being serious about collecting its due. The mere mention of its taxation arm – the IRS, is sufficient to invoke fear into the most honest of taxpayers. One reason for the trepidation generated by the IRS is that it has a potent arsenal of weapons at its disposal to pursue taxpayers who are in arrears, including tax liens and tax levies.
Many people confuse tax liens and tax levies. While neither is desirable, a tax lien poses much less financial danger to taxpayers than a tax levy does. A tax lien represents an initial attempt by the IRS to collect revenues from taxpayers who have failed to either pay their taxes in full or to contact the agency to discuss viable repayment options. By contrast, by the time the IRS gets around to filing a Final Notice of Intent to Levy and Notice of Your Right to A Hearing, otherwise known as a tax levy, taxpayers are in imminent danger of losing valuable assets such as cars or homes to seizure.
It goes without saying that avoiding the dire consequences of a tax levy is desirable whenever possible. Fortunately, taxpayers who take expedient measures can frequently avoid the hammer of the IRS tax levy. Depending on the personal circumstances involved, it may be possible to dodge a tax levy long enough to contact the IRS with alternative arrangements – or even long term.
1. Request a 120-Day Extension
One of the few absolutely guaranteed ways to avoid a tax levy is to repay what you owe to the IRS in full. If you have a reasonable expectation of being able to repay your tax arrears within 120 days, request an extension from the IRS. Once you have made payment, the lien should be released within 30 days, which will automatically cancel the tax levy.
2. Negotiate an Installment Agreement
Back in the day, the IRS was much less flexible about allowing taxpayers to extend payments over time. In recent years, however, the IRS has changed its stance and actively encourages collaboration between agents and taxpayers. So, if you can pay what you owe within a reasonable time frame, generally six years or less, depending on your total balance in arrears, you may be able to avoid a tax levy by negotiating an installment agreement. If so, act quickly to prevent the actual levy from going through.
3. Extend an Offer in Compromise
An Offer in Compromise is a formal arrangement that allows taxpayers to settle their tax obligations by paying less than the full amount due. The Offer in Compromise process requires taxpayers to demonstrate that attempts to collect the full amount owed would present an undue financial burden or would otherwise be unjust. As might be expected, the standard for qualifying for an Offer in Compromise are strict, and taxpayers would be well advised to seek professional advice before pursuing this path.
4. Demonstrate Non-collectible Status
If paying your back taxes – or the execution of a tax levy – would create severe financial hardship, you can seek what the IRS categorizes as “non-collectible status.” Once your tax debt has been designated as non-collectible, all attempts to process tax levies cease. But the tax lien remains on your record, and you must re-apply for “noncollectable status” on an annual basis.
5. File Chapter 7 or 13 Bankruptcy
Under most circumstances, filing either Chapter 7 or Chapter 13 bankruptcy places an immediate halt on all creditor collection actions, including tax levies. But filing a bankruptcy petition only stops a tax levy for as long as the petition is active. And especially if you file Chapter 7 bankruptcy, you may be required to relinquish personal assets anyway to obtain a discharge.
6. Petition for Innocent Spouse Relief
If you filed a joint tax return with your spouse, you are generally jointly liable for any and all tax obligations. But under limited circumstances, it may be possible to escape a tax levy if you can demonstrate that your spouse is individually responsible for being in arrears with the IRS. Qualifying for Innocent Spouse Relief is tough, with strict requirements in place. If you believe you qualify, you would be well advised to seek the services of a professional in preparing your petition.
7. Appeal the Notice of Levy
If you legitimately believe that the IRS has mistakenly imposed a tax levy against you, it is imperative to contact the agency by phone immediately to request an appeal. You must also follow up the phone call with a written petition to appeal the tax levy. It is your legal right to appeal a tax levy, and doing so will stop the process while your appeal is being processed.
8. Allow the Statute of Limitations to Run
The IRS is limited by statute on the amount of time that a tax lien is allowed to stand. If the statute of limitations expires before the IRS imposes a tax levy, you are officially off the hook. But this is a very risky strategy, especially since the IRS may simply impose a new tax lien against your account. On the other hand, if you can demonstrate that the statute of limitations has ALREADY expired, your odds of escaping a tax levy improve significantly. Do not attempt this approach without expert legal advice.
9. Claim IRS Procedural Error
In most cases, taxpayers receive multiple warnings before the IRS executes a tax levy. But sometimes mistakes are made. If you can demonstrate that you did not receive sufficient notice of a tax levy, or that the IRS committed some other procedural error in assessing your account, you can request a Collection Due Process hearing, which will halt a tax levy for 30 days after the date of the hearing.
10. File a Request through the Collection Appeals Program
If you are not satisfied by the results of an appeal or a Collection Due Process hearing, you may file a petition for under the Collection Appeals Program before a tax levy has been executed. You may also file a petition to recover assets such as bank accounts or wages that were wrongfully seized by tax liens under the Collection Appeals Program. But if seized assets such as a home or a car have already been sold, you are pretty much out of luck.
Taxes are never going to be popular and when governments implement new taxes it is always controversial. However, when taxes target certain products or services — especially when it involves things people are passionate about — things get really interesting. This is the situation with the so-called sin taxes
: taxes on products and services which are considered dangerous or detrimental, such as alcohol, tobacco, pot, and prostitution.
Effect of Taxes
Usually, the undesired effect of taxing a product or service is that demand for it drops, which obviously hurts businesses and their ability to pay more taxes. That is why tax policymakers try to find the sweet spot that maximizes revenue without hurting production excessively.
Take for example income tax brackets. In 2013, any income between $36,250 and $87,850 was taxed at 25%, but anything between $87,850 and $184,250 was taxed at 28%. Having to pay 28% taxes on your income is not fun, but it probably won’t stop you from working harder or accepting a job with more responsibility and a larger salary. But what if you earned $87,000 and the tax on income over $87,850 were 90%, would it be worth your time to work harder?
Sin Taxes Rationale
When it comes to sin taxes, the rules change completely. Policymakers generally want to either curb demand for the product or service taxed, or their priority is to maximize revenue from the sin tax, which is then put toward alleviating the negative side effects it generates.
Consider the tobacco tax
. In New York City, which has the highest cigarette tax in the United States, smokers pay $5.85 a pack in state and local taxes. Some feel this tax is unfair because smokers are mostly low-income taxpayers who generally don’t reduce their tobacco consumption and higher taxes simply leave them with less income for life essentials. However, supporters of the tobacco tax argue that these taxes do discourage consumption and simply reflect the true cost of smoking. There is no arguing against the fact that smoking is expensive. Every year, $96 billion are spent on the treatment of tobacco-related illnesses according to a 2012 report by the American Cancer Society.
The rationale for taxing wine, beer and hard liquor is similar. According to a 2013 report by the Centers of Disease Control, over drinking cost each state a median of $2.9 billion in 2006. California had the largest economic burden due to excessive drinking: $32 billion. When you calculate the cost of these additional expenses per drink – what an economist would call calculating the consumption externalities of a product — the CDC estimates the median cost per state for each alcoholic consumed at $1.91.
Tobacco and Booze Are Just the Beginning
Governments are not stopping at alcohol and cigarettes. Last week, Mexico, which recently took the United States’ place as the most obese country in the world, passed an 8% tax on candy
, chips and other high-calorie foods.
Last Tuesday Colorado passed proposition AA, a 15% excise tax – which is measured by the amount of business done – and a 10% sales tax on all recreational marijuana sales in the state. The revenue from the new pot tax is estimated at $70 million and will be used to regulate the marijuana industry and educate people about the harmful effects of consuming the ganja.
In Holland, prostitutes are required to charge a 19% sales tax for each transaction. In the United States, Nevada is the only state where prostitution is legalized – albeit only in certain counties. Although legal brothels and prostitutes must pay federal income tax, there isn’t a specific tax on prostitution. According to Dennis Hof, owner of the Nevada Moonlight Bunny Ranch brothel, the federal government is missing out on an $18 billion business, which could generate $6 billion in income tax and $2 billion in licensing fees.
Controversial and Discriminatory
Alcohol, tobacco, high-calorie foods and prostitution can have very real and harmful health effects on the health of consumers. There is an argument for saying that production costs don’t take into consideration the cost of treating their side effects and taxes are simply accounting for these negative externalities and giving a more accurate reflection of their true cost to society.
Sin taxes are controversial because they discriminate certain habits and lifestyles over others. Some consider them an unwarranted encroachment of the government into our personal lives. Others argue they are inefficient and simply add to the woes of the poorest sectors of society.
What could be better than winning $8.3 million at the World Series of Poker next week?
Not paying taxes on all $8.3 million.
Since a federal court ruling two years ago, there are tax deductions for professional gamblers similar to those for self-employed contractors and small businesses. Expenses like travel, meals, and lodging can be cut from their total income.
This means that if a professional player won $1 million and showed business expenses of $100,000 million during the year – he would only pay taxes on $900,000.
Are You a Professional Gambler?
So how do you prove to the IRS that you’re a professional gambler? Show that you treat the game like a business all year long; that you play to make a profit, not to have fun with your friends.
The federal tax code uses nine guidelines to determine what qualifies as professional gambling, and what doesn’t. Here are a few of those guidelines adapted from an article last year in the Journal of Accountancy.
Don’t have an entourage. Since gambling is usually for fun, you have to show that you are not playing for pleasure, but for a living. It is better to go by yourself. If you want family and friends to keep you company, don’t include them in your business expenses.
“Like most tax issues, accurate and proper tax planning is key. With a sensitive issue, such as professional gambling, having your tax strategy be IRS ready will be vital in keeping your winnings in your pocket. Winning against the Internal Revenue Service is possible, as long as you hold the right cards in your hand.” –Andrew Park, Enrolled Agent at Optima Tax Relief.
How to Report Gambling Winnings?
Gambling winnings are reported through IRS Form W-2G. Depending on how much you win and the type of gambling you undertake, you may receive this form directly from the “payer” or organization from which you won the money. If the payer withholds federal income tax from your winnings, you will receive a Form W-2G. This form, according to Robert W. Wood of Forbes.com, works just like a 1099 Interest Form that you receive as part of tax time preparation forms. He reminds everyone the IRS also receives a copy of the Form W-2G and reminds winners to keep it handy for tax time to ensure full compliance!
If gambling winnings do not meet the following thresholds set by the IRS for the respective type of gambling, it must be reported as “Other income.”
Bingo or slot machines: $1,200
Poker Tournament: $5,000 (excluding wager or buy-in amounts)
“Other” gambling winnings: $600
“Other” gambling winnings are those that do not include poker tournaments, slot machines, bingo, and keno – and the payout is at least 300 times the wager amount).
What if My Winnings don’t Meet the Above Thresholds?
No matter how much income is generated from gambling, it must be reported if you receive a Form W-2G or not. If your winnings do not meet the threshold, you must report your income under the “Other Income” line on the Form 1040 U.S. Individual Income Tax Return.
What do I Do if I Lose Money From Gambling?
Gambling losses may be deducted. Deductions are permitted up to the winning amount. Losses must be reported, as an Itemized Deduction, on Schedule A, separately from any winnings.
How are Winnings and Losses Substantiated?
The IRS requires proof of losses and winnings. In case of an audit and to maintain the integrity of your income tax return, the IRS recommends keeping all records related to winnings and losses. Items to substantiate gambling transactions include tickets, receipts, checks, and IRS Form W-2G (if given). Maintaining a notebook or other written documentation is highly suggested to keep winnings and losses separate and organized.
What Expenses Can Be Deducted?
Like most small businesses, professional gamblers can deduct expenses that the IRS considers “ordinary and necessary” to “carrying on any trade or business.” The website ProfessionalGamblerStatus.com provides a long list of tax deductions for professional gamblers you can deduct, ranging from internet connections (if you play online), to flights, car trips, and meals when you travel to tournaments.
List of Possible Deductions
- Internet Costs, if you regularly play online
- Home office expenses
- Tax advice
- Subscriptions to gambling magazines and newspapers
- Gaming fees, chat room fees
- Club membership fees and dues
- Clerical and record-keeping expenses
- Travel and meal costs during tournaments
- Wages paid to relatives or employees for their assistance
You can also deduct money used to hire a poker coach or someone to keep track of your results. The payment just needs to be “a reasonable allowance for salaries or other compensation for personal services actually rendered,” according to the IRS.
To comply with the laws, make sure you don’t look like you’re trying to take advantage of the system. For instance, taking a taxi and flying coach would arouse less suspicion than renting a private jet and a stretched limo. That also applies for high rollers, who are often offered complimentary hotel rooms, buffets, and rides by casinos. Don’t try to pass those off freebies as expenses.
So what if you’re not a professional but you drive 60 miles, eat lunch, and have a great day at the track? Since you’re not a professional gambler, you can’t deduct any expenses. But you still have to pay taxes on your winnings.
Photo: Play Among Friends