5/14/2013
Tax Issues for
Gamblers
Michael J. Zaino, Esq.
Zaino & Humphrey, LPA
5775 Perimeter Drive, Ste. 275
Dublin, Ohio 43017-3223
Columbus: (614) 799-2800
Dayton: (937) 223-6400
Fax: (617) 799-1500
Email: [email protected]
© 2013 Zaino & Humphrey, LPA
1
RULES OF ENGAGEMENT
2
FAIR TAX TREATMENT
Not For Gamblers!!
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5/14/2013
ALL GAMBLING WINNINGS
ARE TAXABLE.
4
ALL GAMBLING WINNINGS
MUST BE REPORTED.
5
GAMBLING LOSSES MAY
BE DEDUCTIBLE.
6
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5/14/2013
A “SESSION” DETERMINES
GAMBLING WINNINGS &
LOSSES.
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TAX WITHHOLDING MAY
BE REQUIRED.
8
WINNINGS MAY BE
REPORTED TO THE IRS.
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YOU MUST PROVE
WINNINGS & LOSSES.
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PROFESSIONAL GAMBLERS
HAVE DIFFERENT RULES.
11
BIG BROTHER KNOWS
12
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Form W-2G
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REPORTING WINS
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$1,200 or More on Single Spin/Hand
SLOT MACHINES
VIDEO POKER
BINGO
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Winnings over $5,000 Net of Buy-In
POKER TOURNAMENTS
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Winnings over $1,500 Net of Buy-In
KENO
(not video Keno – slot machine)
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All other games:
1. Win $600 or more; AND
2. Win is at least 300 times the
original bet.
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Likely Games for This to Apply:
Table Games, i.e. craps
3 Card Poker
Let It Ride
Horse/Dog Track
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Form 1099 MISC.
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Applies if Received $600 or More:
Non-cash prizes, i.e. car
Casino comps, i.e. hotel rooms,
shows, food, golf
21
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Libutti v. Comm’r, TCM 1996-108
Taxpayer was allowed to treat comps as
gambling income to offset losses.
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Form 5754
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Form 103
“CTRC” or Currency Transactions
Report by Casino
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5/14/2013
Casinos must report to IRS cash
transactions of more than
$10,000 in same day.
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Cash IN or OUT
(Form 8362)
“Structuring” is illegal.
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FinCEN Form 102
“SARC” or Suspicious Activity Report
for Casinos and Card Clubs
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Applies when:
1. Casino knows or suspects
avoiding CTRC.
2. Funds derived from illegal
activity.
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Form TD F 90-22.1
“FBAR” or Foreign Bank Account Report
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Form TD F 90-22.1, Cont.
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Form TD F 90-22.1, Cont.
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The FBAR applies to offshore
casinos for accounts you
maintain.
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Exempt from Reporting to the IRS
1.
Foreign country casinos
2.
Foreign-registered cruise
ships in international
waters
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5/14/2013
Tax Withholdings
1.
Regular
2.
Backup
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Regular Withholdings – 25% if:
1.
Win more than $5,000,
less wager; AND
2.
Win at least 300 times
more than wager.
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Likely to Occur With:
1.
Table games, i.e. craps –
“fire bet”
2.
Horse or dog racing
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5/14/2013
Regular Withholdings – 25% on
net win if over $5,000 for:
1.
2.
3.
4.
Lottery
Raffle
Sweepstakes
Non-cash Prizes
37
But NOT Required for:
1.
2.
3.
4.
Slot Machines
Bingo
Keno
Poker Tournaments
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Non-Cash Prizes Either:
1. Winner pays the withholdings to
casino; OR
2. Casino pays and adds it to the
income plus uses 33%
withholdings.
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5/14/2013
Backup Withholding
Required if the player does not
give the casino the TIN.
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This includes wins on:
1.
2.
3.
4.
Slot Machines
Bingo
Keno
Poker Tournaments
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THE FUN BEGINS WITH
GAMBLING “SESSIONS”
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A “Session” is a period of
continuous gambling of the
same game without cashing out.
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A player’s session is not limited
to one table or machine.
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EXAMPLE:
Buy-in at the Craps Table
for $500.
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During the first 3 shooters’ roll
you lose $400.
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The next shooter makes you
$1000.
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On the next shooter, you lose
$300 so you stop and cash out.
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Player had a $300 winning session.
($500 - $400 + $1,000 - $300 = $800,
less $500 buy-in,
nets $300 income session)
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EXAMPLE:
Buy-in at Blackjack Table
for $1000.
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After the first hour player has
$2,300 in chips.
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Of course, the player continues
to play.
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After one hour, player quits with
$100 in chips.
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Player has a $900 losing session.
($1,000 - $100 = $900 losing session)
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5/14/2013
Gambler must separately track
for the year:
1. All winning sessions; FROM
2. All losing sessions.
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Example:
Date
Game
Buy-In
Cashed-Out Win
Loss
12/06 Craps
$1,000
$2,100
$1,100
$0
12/06 Slot Machine $100
$0
$0
$100
12/06 Let it Ride
$350
$0
$150
12/06 3 Card Poker $250
$50
$0
$200
12/06 Blackjack
$200
$100 . $0
TOTAL
$1,200
$500
$100
.
$450
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All winning sessions for the year
must be added together and
reported as gambling income.
57
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A player’s session at the craps
table can consist of moving from
one table to another over a two
hour period without cashing out.
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Note: Starting a new game ends
the prior session even when the
player did not cash out.
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Poker tournaments are counted
as one gambling session.
60
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Of the following, each is
considered one gambling session:
1.
2.
3.
4.
5.
6.
a horse race
a dog race
a sporting event
bingo cards – per pack
each lottery drawing
each keno game
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BIG PROBLEM
Form W-2G vs. Win/Loss Sessions
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EXAMPLE:
Player puts in $2,001 to Slot
Machine and on the 3rd pull wins
$10,000. A Form W-2G is
issued. Player continues to play
with the winnings. Four hours
later, player leaves the Slot
Machine with $1.
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Result:
One losing session = $2,000
One Form W-2G = $10,000
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The Recreational Gambler’s
documentation of wins & losses.
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Burden of proof is on the
taxpayer.
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5/14/2013
Gambling Diary
•
•
•
•
•
Contemporaneously completed
Separate diaries for Husband & Wife
Do not file with tax return
No formal format
Use pen and hand write it
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At the minimum, include the
following in the diary:
• Date of play.
• Name & place of play.
• Name of game played.
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•
•
•
•
Bet amount.
Amount cashed out.
Win or loss for that session.
Others playing with you.
(Rev Proc 77-29)
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IRS also likes:
• The number on the slot machine.
• The number of the table game.
• The beginning and ending times
of play.
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NOTE:
1. Illegal gambling wins are
reportable income.
2. Illegal gambling losses are
deductible.
i.e. betting sports when
illegal where you live.
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Additional Diary documentation
proves invaluable during audits:
1. Prove you were at the casino
A. parking stubs
B. hotel receipt
C. food receipts
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2. Wagering ticket
(i) keno
(ii) horse racing
(iii) lottery
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3. Casino win/loss statements
4. Cancelled checks to casino
5. Credit receipts for casino
advances.
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Casino Win/Loss Statements
on audit:
1. PRO-Bain v. Comm’r
TCM 091299D (06/10/10)
2. CON-LaPlante v. Comm’r
TCM 2009-226
3. Disclaimer on statement
4. Cash-in and Cash-out counted twice
75
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5/14/2013
Example of a blank Diary Page:
Date
Time
Location
Game
Net Win
Net Loss
W‐2Gs
Accompanied
by
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The Tax Return of the
Recreational Gambler
1. Documentation
2. Determine Winning vs. Losing
Sessions
3. Itemizing
4. Finalize the Tax Return
77
Documentation
1.
2.
3.
4.
Summarize log (or create it).
Gather IRS forms, i.e. W-2G.
Obtain casino win/loss statements.
Gather “other” evidence for use in
audit.
5. Estimate if necessary. “Cohan Rule”
78
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5/14/2013
Determine
Winnings vs. Losing Sessions
1. Total all winning sessions for the
year (total may not match Forms
W-2G and 1099 MISC.).
2. Total all losing sessions for the
year (do not include expenses such
as travel, hotel, food).
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Itemizing
1. Must Itemize before you can
deduct gambling losses.
2. Otherwise gambling losses are lost
forever; no carry back/no carry
forward.
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Itemizing, cont.
3. Deduct gambling losses only to
extent of gambling winnings.
4. The loss deduction is NOT subject
to AGI limits. (See Pub. 529)
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5/14/2013
Finalize the Tax Return
“Gambling Winnings” are reported
on Form 1040, other income, line 21.
Note: Gambling losses are not
netted here.
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“Gambling Losses” are reported on
Form 1040, Schedule A, line 28 to
extent of winning.
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Form 1040, page 1
84
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Schedule B
85
Schedule A
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Form 1040, page 2
87
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BIG PROBLEM
Form W-2G vs. actual winning income
1. IRS knows this occurs.
2. IRS not sure how to handle.
88
Solutions
1. Report more winnings over Form
W-2G amount if losses will cover
wins reported.
2. Report proper winning session’s
income and include explanation
why Form W-2G higher than
amount reported.
89
Unfair Tax Treatment
for Gamblers
90
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1. Gambling Winnings included in
AGI may cause an increase for
7.5% and 2% itemized deduction.
2. Social Security Income to become
taxable.
3. Tax credits to be lost, i.e. earned
income tax credit.
91
Form 1040, page 1
92
Schedule B
93
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5/14/2013
Schedule A
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Form 1040, page 2
95
State Tax Treatment of
Gambling Activity
1. Pay tax where you live.
2. May owe tax where you won.
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5/14/2013
OHIO
•
Gambling Income is in federal
AGI, thus Ohio taxes gambling
income.
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IS WINFALL OVER?!?!
•
•
2012 & prior – Ohio not allow
offset of gambling wins with
gambling losses.
In 2013 – Will Ohio allow
gambling losses to offset
gambling wins? (H.B. 519 vs.
H.B. 59 vs. S.B. 108)
98
NON-RESIDENTS
If you win in an out-of-state casino
remember:
• That State wants you to pay tax.
• That State gets a copy of all forms
W-2Gs.
• The Ohio tax credit offset for tax
paid to another state.
99
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5/14/2013
SO YOU WANT TO BE A
PROFESSIONAL GAMBLER
(See IRS Form 1040, Schedule C)
100
Gambling must be a bona fide
business activity and NOT a hobby.
101
Comm’r vs. Groetzinger
(480 U.S. 23, (1987))
Two requirements to be a professional
gambler were set forth:
1. the gambling activity must be
continuous and regular; AND
2. done primarily to earn a profit.
102
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5/14/2013
What is Primarily to
earn a Profit?
103
1.
2.
To make money – not have fun.
See IRS Regs Section 1.183-2(a).
A. Treat the gambling activity
like a business.
i. Accurate books and
records.
ii. Separate bank accounts
from personal accounts.
iii. Have business cards.
iv. Create a business plan.
104
B. Obtaining expertise; read,
practice.
C. Spending time or effort at
the business.
D. Showing success in the
activity, i.e. winning.
E. Show 3 of 5 years of profit –
no guarantee on audit.
F. Gambling should be the main
source of income.
105
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5/14/2013
Congratulations, you are a
Professional Gambler!
(but you win some and lose some)
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PRO
- net gambling winning sessions
against losing sessions (thus lower
AGI).
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PRO
- deduction of business expenses
(§162(a)).
108
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5/14/2013
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Hotel and meals.
Travel to casinos.
Tips to dealers.
Health insurance.
Retirement plan contributions.
Tournament entry fees.
Professional journals.
Office supplies.
Home office expenses.
Accounting and legal fees.
Gambling software.
Gambling seminars and educations.
109
CON
- subject to self-employment tax.
- cannot deduct excess gambling
losses (§165(d)).
- no carry forward or carry back of
excess gambling losses.
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Remember, the Recreational
Gambler CANNOT offset other
gambling related expenses
against gambling winnings.
111
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113
114
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115
116
117
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119
120
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Note: The Professional
Gambler may carry back
and carry forward excess
business expenses
(§162(a)) to other years.
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OH NO! CITIES!
What to do?
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Columbus
•
Income includes gambling winnings
•
Residents and Non-residents
•
Only if reported on W-2G; Form
5754, etc.
•
No gambling losses offset
123
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5/14/2013
Cincinnati
•
Income includes gambling winnings
•
Residents and Non-residents
•
Only if reported on W-2G; Form
5754, etc.
•
No gambling losses offset
124
Toledo
•
Income includes gambling winnings
•
Residents and Non-residents
•
Up to $2,500 gambling loss
deduction
125
Cleveland
•
Income includes gambling winnings
•
Residents and Non-residents
•
No gambling losses offset
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5/14/2013
If Others Tax
•
Gambling winnings as reported on
IRS form W-2G, Form 5754, etc.
•
No gambling losses offset
•
Dublin, Gahanna, New Albany,
Centerville
127
H.B. Nos. 5 and 601
NEVER PASSED - §718.01(B)(4):
Lottery, sweepstakes, gambling
and sports winnings, winnings
from games of chance, and prizes
and awards, minus (hurrah) related
deductions authorized under the
IRC and claimed against such
winnings.
128
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