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Tax Rules on Gambling Winnings and Losses

22 March 2000

By David Waddell

It's that crazy time of year, tax season. With 18 tribal casinos and two Detroit casinos now open in the State of Michigan, many residents are, for the first time, faced with figuring out how to report their gambling winnings and losses. This column will provide a detailed overview of the tax rules applied by both the Internal Revenue Service ("IRS") and the Michigan Department of Treasury ("MDT"). As a starting point, please remember - don't shoot the messenger!

The IRS requires all gambling winnings to be reported on line 21 of your income tax return (Form 1040). Gambling losses can be deducted as itemized deductions so long as the deduction does not exceed the amount of the gambling winnings. Notably, however, if you are a taxpayer who takes the standard deduction, and does not itemize, there is no deduction for these losses.

The IRS states that you cannot simply reduce your gambling winnings by your gambling losses and report the difference. Instead, you must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction.

Significantly, under the tax rules, you are required to report all winnings, even those that are less than the dollar threshold that cause the casino or track to issue a W-2G to you. This rule also requires the reporting of winnings a United States citizen wins at Casino Windsor. You may recall the controversy created last summer when Casino Windsor was advertising "tax-free" winnings on a Detroit billboard. Attorney General Jennifer Granholm expressed her concern, which lead to a change in the casino's advertising campaign.

As with any form of itemized deduction, the IRS expects you to keep very detailed records of your gambling activities to substantiate your winnings and losses.

IRS Publication 529 provides the following advice regarding documenting gambling winnings and losses:

"Diary of winnings and losses.

You must keep an accurate diary or similar record of your losses and winnings. Your diary should contain at least the following information:

- The date and type of your specific wager or wagering activity

- The name and address or location of the gambling establishment

- The names of other persons present with you at the gambling establishment

- The amount(s) you won or lost.

Proof of winnings and losses.

In addition to your diary, you should also have other documentation. You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings, Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment.

For specific wagering transactions, you can use the following items to support your winnings and losses.

Keno: Copies of the keno tickets you purchased that were validated by the gambling establishment, copies of your casino credit records, and copies of your casino check cashing records.

Slot machines: A record of the machine number and all winnings by date and time the machine was played.

Table games (twenty-one (blackjack), craps, poker, baccarat, roulette, wheel of fortune, etc.): The number of the table at which you were playing. Casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage.

Bingo: A record of the number of games played, cost of tickets purchased and amounts collected on winning tickets. Supplemental records include any receipts from the casino, parlor, etc.

Racing (horse, harness, dog, etc.): A record of the races, amounts of wagers, amounts collected on winning tickets and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.

Lotteries: A record of ticket purchases, dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winning statements.

These record keeping suggestions are intended as general guidelines to help you establish your winnings and losses. They are not all inclusive. Your tax liability depends on your particular facts and circumstances."

A frequently asked question in Michigan is how do you deduct gambling losses on your Michigan Income Tax Return? The simple answer is you don't. Under the Michigan Income Tax Laws administered by the MDT, the state does not recognize gambling losses as a deduction. Bob Reinhart, a C.P.A. with Plante & Moran, explains that "gambling losses are treated in the same manner as any other itemized deduction such as mortgage interest expense or charitable contributions. The state begins with your federal adjusted gross income, which includes gambling winnings, and does NOT allow a deduction for any itemized deduction - such as gambling losses. Therefore, taxpayers truly do get taxed on their winnings with no offset for their losses on their Michigan return." Thus, gambling winnings are generally taxable in this state with no deduction for losses. The only exception to this might exist if an individual could be characterized as a professional gambler with losses being an expense of doing business. However, it is not at all clear whether the taxing authorities would respect such a characterization. This rule really does not make sense and already has been the subject of some discussion in the Michigan Legislature. However, until the legislators hear a lot of complaints from gamblers, no action will likely be taken.

David Waddell
David Waddell is an attorney for Regulatory Management Counselors, P.C. (RMC), which assists businesses in navigating the legislative, regulatory and licensing systems governing Michigan’s commercial and tribal casino industries. He is the co-author of The State of Michigan Gaming Law Legal Resource Book and one of the founders of The Michigan Gaming Newsletter.

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