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Gambling income, unsurprisingly, is subject to income tax. This post is an overview of federal and Michigan treatment of gambling income and losses.
Even if you lost $100,000 that year, your gambling loss deduction is limited to $13,000. Worse, you aren't allowed to carry forward the excess, so if you had $87,000 in losses you couldn't deduct. Example: John likes to play blackjack and had winnings of $40,000 in 2009. He also lost $90,000 in the same year. John has to report his $40,000 winnings as income, but he can only deduct $40,000 of his gambling losses because gambling losses are limited to gambling winnings. Excess gambling losses cannot be carried forward. A problem gambler is suing the B.C. Lottery Corporation for allegedly allowing him to keep gambling after he joined a self-exclusion program but then refused to pay when he won a $40,000 jackpot.
Albert Belle, the slugger whose career has been tainted by temper outbursts, suspensions and fines, has admitted under oath that he recently lost as much as $40,000 betting on sports. Belle, who left the Cleveland Indians and became baseball's highes t-paid player by signing a $55 million, five-year contract with the Chicago White Sox in. Lost 40000 Gambling as well as gameshow-style games, in real time Lost 40000 Gambling and in high definition. The live casino games are all powered by Evolution Gaming, a software provider who has won numerous Lost 40000 Gambling.
FEDERAL TAX TREATMENT OF GAMBLING INCOME & LOSSES
On your federal income tax return, you can take an itemized deduction for gambling losses, but only to the extent of gambling income (in other words you can’t claim an overall loss on gambling activity).
Example: John likes to play blackjack and had winnings of $40,000 in 2009. He also lost $90,000 in the same year. John has to report his $40,000 winnings as income, but he can only deduct $40,000 of his gambling losses because gambling losses are limited to gambling winnings. Excess gambling losses cannot be carried forward.
It should be noted that taxpayers must itemize to claim gambling losses.
Example: Joan won $4,000 in the lotto in 2009. She also lost $5,500 in other gambling activity during the year. If she does not itemize, she has to claim the $4,000 in income and cannot deduct the $5,500 in gambling losses—not a good result.
Even though the itemized deduction for gambling losses can offset gambling income, it is a below-the-line deduction (i.e., it is taken after computing AGI). AGI is used to calculate various phaseouts for credits and deductions. Therefore, gambling income may affect your phaseouts even though they are offset by gambling losses.
MICHIGAN TAX TREATMENT OF GAMBLING INCOME & LOSSES
In Michigan, gambling income is based on the amount of gambling winnings included in federal AGI (the bottom line of the first page of your Form 1040) without taking into account the itemized deduction for gambling losses. So, in the above examples, John has $40,000 in gambling income on his MI-1040 and pays $1,700 in tax and Joan has $4,000 in gambling income on her MI-1040 and pays $170 in tax even though both John and Joan had overall gambling losses.
To get around this unlucky result, the strategy is to use gambling losses to directly offset gambling income, rather than take gambling losses as an itemized deduction. There are two ways to do this:
* Special Rule for Slots and other Casual Gambling
* Becoming a professional gambler (harder than you think and will not be discussed here)
SPECIAL RULE FOR SLOTS AND OTHER CASUAL GAMBLING
Generally, gambling winnings and losses have to be determined on a wager-by-wager basis. For causal gambling (slots, poker, blackjack, horse racing, etc.) you can determine gambling winnings and losses on a net daily basis. By figuring gambling income on a daily basis (rather than wager-by-wager) gambling winnings are directly offset by gambling losses (and thus become excludable from Michigan income tax).
Example (wager-by-wager basis): Jimmy goes to the casino on Friday and buys $1,000 in tokens to play slots. He has $9,000 in winning spins and $6,000 in losing spins. He cashes out on Friday with $3,000. Jimmy wants to continue his winning streak on Saturday. He buys $4,000 in tokens. This time Jimmy has $1,000 in winning spins and $5,000 in losing spins. He leaves the casino with nothing.
On a wager-by-wager basis, Jimmy has $10,000 in winning spins over the two days and reports this amount as income. Jimmy has $11,000 in losing spins over the two days and deducts his losses as an itemized deduction (limited to the $10,000 in gambling winning). However, on Jimmy’s Michigan tax return, he must report the $10,000 as income, but cannot take a deduction for gambling losses.
Same Example (daily basis): Jimmy’s daily gambling winnings and losses are netted. Jimmy has overall income of $2,000 on Friday (Cash Out: $3,000 & Cash In: $1,000) and an overall loss of $4,000 on Saturday (Cash Out: $0 & Cash In: $4,000). On a daily basis, Jimmy had $2,000 of gambling winnings on Friday and $4,000 of gambling losses on Saturday. On his federal return, he must report $2,000 of gambling winnings and gambling losses of $2,000 (again, the itemized deduction for gambling losses is limited to gambling winnings). On his Michigan return, he only reports the Friday daily winnings of $2,000.
It is CRITICAL that gambling winnings and losses be properly documented. The following information should be maintained in a log:
1. the date and type of specific wager or wagering activity
2. the name and address of the gambling establishment
3. the names of other persons present with the taxpayer at the gambling establishment
4. the amount won or lost
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
We doubt that anyone ever woke up thinking, “Gee, I hope I get audited by the IRS this year”. An IRS audit could easily be one of the worst things that could happen to you this year. So if you want to avoid receiving that ominous letter from the IRS that your 2015 tax return is being audited here are seven red flags you need to totally avoid.
Not reporting all of your taxable income
Those 1099’s and W-2s you received this past January? You weren’t the only one that got them. The IRS got them too. It’s important to make sure you report all of the required income on your return. The computers used by the IRS are pretty darn good at matching the numbers on your return with the numbers on your 1099s and W-2s. If they turn up a mismatch this will create a red flag and the IRS computers will spit out a bill. If those darn computers do make a mistake and you receive a tax form that shows income that wasn’t yours or lists incorrect amounts of income, you will need to get the issuer to file the correct form with the IRS. And what about that income you earned on those side jobs? In most cases you should have received a 1099 documenting your earnings. If not, this is definitely a case where it’s better to be safe than sorry and report it.
Taking deductions that are higher than average
If the IRS spots deductions on your return that are disproportionately large in comparison with your income, it may pull your return for review. For example, a very large medical expense –again out of proportion to your income – could cause a red flag. However, if you do have the documentation to support the deduction then don’t be afraid to claim it.
Claiming really big charitable deductions
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Charitable deductions can be a great write off. Plus, when you contribute to a charity it can make you feel all fuzzy and warm inside. However, if those deductions are disproportionately large in comparison with your income, it will raise a red flag. The reason for this is because the IRS knows what is the average charitable deduction for people at your level of income. Did you donate some very valuable property? In this case we hope you got an appraisal for it. Did you make a non-cash donation over $500? Then you better make sure you file form 8283. if you don’t file this form or if you don’t have an appraisal supporting that big donation you’ll become an even bigger target for auditing.
Claiming big gambling losses or not reporting gambling winnings
If you’re a recreational gambler you must report your winnings as “other income” on the front page of your 1040 form. If you’re a professional gambler you will need to report your winnings on Schedule C. If you don’t report gambling winnings this can draw the attention of the IRS – especially in the event that the casino or other venue reported your winnings on form W-2G. It can also be very risky to claim big gambling losses. In fact, what you should do is deduct your losses only to the extent that you report your gambling winnings. For example, if you were to report you had won $5000 gambling but had losses of $20,000, this could cause a red flag. Also, only professional gamblers can write off the costs of meals, lodging and other expenses related to gambling. And the surest way to invite an audit is by writing off what you lost at gambling but no gambling income. If you’ve done any of these things, or are worried about some other common tax return mistakes, it might be wise to file an amended tax return and account for those wins or losses correctly.
Writing off a hobby as a loss
You will dramatically increase the odds of “winning” an IRS audit if you file a schedule C showing big losses from any activity that could be considered a hobby such as jewelry making, coin and stamp collecting, dog breeding, and the like. IRS agents are especially trained to ferret out people who improperly deduct losses associated with a hobby. You must report any income your hobby generated or whatever but can then deduct your expenses up to that income level. But the IRS will not allow you to write off losses from a hobby. So if you want to write off a loss you must be running your hobby as if it were a business and must have the reasonable expectation of generating a profit. As an example of how this works if your hobby generates a profit in 3 out of every 5 years then the IRS will presume that you’re actually in business to make a profit unless it can prove something to the contrary. Of course, if you’re unfortunate and win the audit lottery the IRS will make you prove that you do have a legitimate business and that it’s not just a hobby. So make sure you keep all documents that support your expenses.
If you report income from self-employment of $100,000 or more
Let’s suppose that you’re self-employed, had a really great year and had earnings of $100,000 or more you are reporting on schedule C. This is likely to trigger an IRS audit because according to the IRS people who file a schedule C are more likely to under report their income and overstate their deductions. What this means is that if you earn $100,000 or more and are reporting it on schedule C you’ll need to make sure you have the documentation necessary to support your deductions and again, make sure you report all your income very accurately.
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If you work in certain industries
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The IRS knows based on past audit experience that there are certain activities or industries that have a higher incidence of what’s technically called noncompliance but really means cheating on their taxes. Included in this group are the tax returns of air service operators, gas retailers, auto dealers, attorneys and taxi operators. So, if you’re employed in one of these industries or activities and don’t want to suffer an IRS audit, it’s best to follow the old adage that honesty is the best policy.