Jan 30 '18 at 17:09
Court Case: A taxpayer won $2,000 on a slot machine, but ended up ahead only $1,100 at the end of the day. The taxpayer did not report the winnings on the tax return, and did not itemize deductions to claim the losses. So, if the amount won on a slot machine is higher than $1200, the casino is required to report it. In other words, all your gambling winnings have to be reported on your tax return as 'other income' on Schedule 1 (Form 1040), line 8. Slot Machine Winnings in W-2G Form.
Tax Advice for Casino Players: W2-G Handpay Jackpots, Filing as a 'Pro' and More
The feeling of stress and anxiety that comes when filing taxes can be overwhelming for anyone, but especially for casino players that hit slot jackpots or enjoy other high stakes gaming.
Everyone has a different opinion about how to file, and there are very few resources available that give gamblers peace of mind. That’s why I recently sat down with Ray Kondler of Kondler & Associates. Ray is a Certified Public Accountant based in Atlantic City and Las Vegas.
He’s also one of the top national experts on gambling taxes.
While Ray works closely with the World Series of Poker, he also serves slot and table players in all 50 states. In our fascinating conversation, Ray gave us the insider’s look at gambling taxes, keys for minimizing the chances of an audit, and tips for paying as little as possible… while staying within the bounds of the law, of course!
Here are the highlights from our great conversation. (You can also watch or listen to the full episode below.)
The First Thing Gamblers Should Know About Taxes
One of the most common questions new gamblers ask is, “When do I have to report my winnings?” The answer actually varies depending on what you play.
Casinos will issue W-2Gs for winnings greater than $1,200 from a slot machine or $5,000 from poker. The moment you hit the jackpot, a casino staff member will bring the W-2G to you at the machine to get a signature (although new technology is emerging in high limit slot areas that lets players electronically sign the W-2G so they can get back to playing right away). The casino sends a copy of all W-2Gs to the IRS.
(Table game players don't face the same level of scrutiny. Casinos don't issue W-2Gs for table games like craps and blackjack.)
Did you know that the IRS matches up the W-2Gs the casino sends with your tax return?
Do You Have To Report Slot Machine Winnings
This is extremely important! If you fail to file those winnings on your tax return, in most cases, the IRS will send a notice asking you to amend your return.
Want to protect yourself from an audit? Download our FREE Casino Player's Logbook to start keeping better records of your gambling activity.
As Ray points out, this practice isn’t limited to land-based casinos. Cruise lines also issue W-2Gs, and US Citizens are required to pay tax on gambling income earned worldwide — not just in the US.
The bottom line is, if you receive a W-2G, don’t ignore it. The IRS sure won't...
Once gamblers know which winnings to report, the next question is usually, “How do I minimize my tax bill?”
Filing as a Professional Gambler
When Ray sits down with a client, one of the first decisions they make is whether the player should register as a professional gambler.
Most slot players wouldn't even think of filing as a professional. (To be honest, I didn't even know that was an option before speaking with Ray). For slot players, especially retirees or those with limited other income, filing as a professional gambler comes with a unique set of advantages.
In most states, a normal casino player (aka amateur gambler) can only write off casino losses up to their total winnings. So, for example, if you have $100,000 in W-2G winnings, but lost $150,000 during the year, you can only write off $100,000 of losses when filing taes.
When Do You Have To Report Slot Machine Winnings Money
***Note: some states (Connecticut, Illinois, Indiana, Massachusetts, Michigan, West Virginia, and Wisconsin) do not allow amateur gamblers to deduct gambling losses from their winnings. The only way around this is to file as a professional and deduct losses as an “expense of doing business” on a Schedule C.
On the other hand, a professional gambler can deduct other expenses associated with their casino play (it's a JOB after all - ha!). If they have $100,000 in W-2Gs, they can write off $100,000 in losses AND subscriptions to gambling resources, travel and meal expenses, home office expenses, and legal/professional fees. Professionals can then actually show a net loss on their Schedule C (Self-Employment) tax return and deduct it against their other income (like taxable Social Security income).
So who can qualify as a professional?
It turns out, qualifying as a pro isn’t based on winnings. It’s actually based on how much time someone spends gambling. Someone who plays slots five or six hours per day and has no other job could most likely file as a professional. This is especially useful for gambling retirees!
When advising retired clients, Ray recommends filing as a professional as soon as their Social Security income is taxable (over $40,000). This allows any below-the-line gambling losses to reduce taxable income.
Filing as a professional makes sense for many casino players, but there also are a few downsides to be aware of.
First, filing as a professional increases your chances of being audited.
Another downside is if you file as a professional and win a significant amount, you’ll have to pay Social Security tax.
Depending on the amount of Social Security tax, it may be smarter to file as an amateur. This is something Ray and his team help their clients figure out. They’ll complete the tax returns both as a professional and as an amateur. Then they will see which filing status makes the most sense for the client for that particular year.
It’s also worth noting that filing as either a professional or amateur one year doesn’t lock you in to that status for following years. For example, let’s say you filed 2016 tax return as an amateur gambler. In 2017, you gambled the same amount of time, but due to an increase in winnings, it makes more sense to file as a professional. This is allowed by the IRS. You can decide which filing status is right for you on a year to year basis.
How to Protect Yourself From a Tax Audit
While casual and moderate gamblers have a relatively low chance of being audited, the prospect of being audited is stressful for anyone. Ray says the most important thing you can do to protect yourself is to keep good records.
It might be a pain in the neck, but everyone should keep clear, detailed records — especially if you’re filing as a professional.
Ray recommends using a dedicated credit/debit card to charge all gambling-related expenses. Then keep track of all gambling activity with a logbook.
Want to protect yourself from an audit? Download our FREE Casino Player's Logbook to start keeping better records of your gambling activity.
Most of Ray’s clients log their activity in a spreadsheet at the end of the week, but he has many clients that keep daily records. While there are several logging apps available to gamblers, they tend to be clunky or difficult to use. Some clients use old-fashioned pencil and paper, but Ray recommends keeping a spreadsheet.
The team at Kondler & Associates have even created several logbook spreadsheet templates they send to their clients to simplify the process.
Some gamblers think of keeping logbooks as an unnecessary step. Instead, they simply rely on the win-loss statements casinos send out to their loyalty club members. This can be effective, but any gambling done at other casinos (where they don’t have a loyalty card), isn’t reflected in those statements.
By keeping a logbook, you can ensure your losses at any casino (even those where you aren’t a loyalty member) are accounted for in your taxes. This lowers your tax bill and protects you
Ray also points out that even if you failed to keep a good logbook in the past, you can go back and recreate it. In the event of an audit, the IRS can request ATM receipts to prove your records are accurate. But if you claim to have gambled with cash from a safe deposit box, no one can prove otherwise.
Another thing to consider for slot players is how to handle the tax liability from a 'group pull'jackpot (for those that don't know, this is where a group pools money and hits the high limit slots in search of JACKPOTS). Let's say you and four other players decide to throw equal money into a pot and hit the high-limit slot rooms. If the group hits the jackpot, only ONE person will sign the W-2G, meaning that person accepts all of the tax liability (even though they only took 20% of the winnings!).
The way to avoid getting stuck footing the entire tax bill is to document the payouts with 1099s. If you win a big jackpot in a group pull, make sure to gather the other players’ full names, addresses, and Social Security numbers before handing out the money. Then issue a 1099 to each player for their share of the winnings.
If you do the extra step of issuing 1099s to the people in the winning group pull, then when you file your taxes, you can feel comfortable only claiming your 20% take of the jackpot on your tax return because you'll have a nice paper trail to show the IRS if they come sniffing around.
Comps and the IRS
When casinos issue comps, gamblers can potentially receive incentives worth thousands upon thousands of dollars. So, how does the IRS tax these comps?
The short answer is they don’t tax comps.
In over 30 years of working as a CPA, Ray has never seen a 1099 issued for comps. This would be a record-keeping nightmare for casinos if they had to document every meal or lodging comp for tax purposes.
He has seen 1099s issued for prizes though. For example, if there’s a drawing and you win $2000, you’ll receive a 1099 for “other income”. This is also true for prize winnings like free cars or other expensive merchandise. While it’s different from a W-2G, it’s still required to report on your taxes, but these are extraordinary circumstances.
Regarding normal comps, there’s no need to report them as income.
Professional Help for Gambling Taxes
Whether you’re a slot player, table gamer, or poker player, there’s a good chance you’d rather spend your time playing than worrying about taxes.
There are a lot of extremely talented CPAs all around the country, but many don't have a clue how to minimize tax winnings because they rarely see it. Ray's team works on minimizing tax exposure from gambling winnings all day every day
So, if you have any questions about gambling taxes, feel free to reach out to Kondler & Associates HERE. They never charge for calls or emails, and they’re extremely quick to reply. They’re an incredibly valuable resource, so don’t hesitate to reach out. For more on Ray and his firm Kondler & Associates, visit KondlerCPA.com.
Want to protect yourself from an audit? Download our FREE Casino Player's Logbook to start keeping better records of your gambling activity.
2 Comments
FEB 3 '18
I'd like to add a little color to this article by pointing out a few changes that will go into effect for the 2018 tax year as a result of the new tax bill. Professional gamblers used to be able to deduct expenses as well as offset winnings with losses. The new way, their deduction is capped at the amount of winnings. More significantly, for mid-rollers like myself (I do $4,000 - $5,000 a day coin on slots over about 28 days a year in Vegas; some years I have no handpays and some years I have a few) - while it is true that winnings can still be offset with losses if you itemize, because of the increase in the standard deduction as well as the elimination of the personal exemption(s) and capping of property/state tax deduction at $10,000, the threshold for itemizing has basically been doubled. Whereas in the past, I have always been able to totally offset W-2G winnings with losses, with the new law and my current level of still allowed itemizable deductions (mortgage interest and property/state income tax) I would now have to have at least $12,000 in W-2Gs to be able to itemize, and even then, I would still end up paying Fed taxes on that first $12,000. Finally, with respect to group pulls - I've organized several and I have always been lucky to have a UK resident participating who is not subject to taxes OR withholding. Under the new tax law, I will not do one unless that condition is present. I'm not saying you shouldn't do one, they're a lot of fun, but if you do, make sure you consider the tax implications and discuss how you are going to handle a handpay with the participants ahead of the event. Hitting a big win and then determining that 12% or 22% or more is going to have to come off the top is not going to be a welcome surprise to the group.
FEB 6 '18