America is a nation of risk takers, so it's no surprise we love games of chance. That's even more evident each year when the NFL's big event, the Super Bowl, rolls around.
The Super Bowl is the most gambled-on sporting event in the United States, with more than $100 million wagered on the game in some years. And that's just the legal betting at sports books in Nevada where federal law allows sports gambling.
American Gaming Association data, complete through 2010, show legal sports wagering in Nevada that year totaled $2.76 billion. But that figure is dwarfed by illegal bets. The National Gambling Impact Study Commission estimates illegal sports wagers amount to as much as $380 billion annually.
If the gambling study estimate is even remotely accurate, the U.S. Treasury is missing out on an enormous amount of revenue since gambling winnings, whether obtained legally or illegally, are taxable.
But good luck, Internal Revenue Service collections agents, on getting your hands on ill-gotten gambling gains.
The federal tax agency has enough trouble collecting from legal bettors. Many people don't realize gambling winnings are taxable income. And even if the winners know that, a good many simply choose to ignore the tax law.
What the IRS knows:
This skirting of tax laws is possible because the IRS doesn't know about every bet, and it is only aware of the big winners.
Legal betting operations -- state lotteries, casinos and horse-racing tracks -- are regulated and that means there are rules for reporting when players are paid.
In some cases, the IRS gets its portion when winners are paid. Twenty-five percent is withheld from winnings of more than $5,000 from any sweepstakes, wagering pool or lottery or from betting proceeds that are 300 times or more the amount of the bet.
Regardless of whether money is withheld, when a casino or other betting operation gets your tax ID, your winnings show up on a Form W-2G.
But even if you don't get an official form, you're still supposed to report all your gambling winnings to the IRS. In reality, that doesn't happen.
The IRS has no official idea how much tax money it doesn't collect from lucky gamblers. But even if the tax agency ventured a guess, it likely would be low, since there are so many under-the-radar ways for gamblers to play.
One of the major gambling venues nowadays is online. And despite efforts to control Internet gambling, U.S. bettors are still frequenting the websites, with many not telling the IRS about their winnings. Several of these sites' principals, as well as individuals processing financial transactions to and from these sites, were indicted for bank fraud, illegal gambling and money laundering.
If states and Uncle Sam do eventually approve access to online gambling, the accompanying regulations could help the IRS get more winners to comply with tax laws.
Most people fall into the recreational category; they visit a casino or racetrack a couple of times per year or buy lottery tickets. In these cases, any winnings should be reported to the IRS as "other" income. Recreational gamblers also can reduce the amount of their taxable winnings by itemizing their expenses and counting gambling losses as a deduction in the "other miscellaneous deductions" category of Schedule A.
A recreational gambler can't simply net wins and losses -- that is, combine them and report only the total. Rather, a gambler must add all winnings and report them as income. The losses are itemized and can be claimed as a deduction, but only up to the amount of winnings reported that year.
To substantiate these amounts, the IRS says you must keep records of every single gambling session. You spend 15 minutes at the craps table and finish up with $500. Take a break, then spend 45 minutes at the blackjack table. That's another session. In my opinion, that's overly burdensome. Who really does that?
Another documentation requirement, per IRS Publication 529, Miscellaneous Deductions, is that you keep a diary or log of gambling activities. The log is supposed to show not only the amounts you win or lose, but also the date and type of your specific wager or wagering activity, the name and address or location of the gambling establishment, and the names of other persons present with you when you gambled.
If you get the 'Dear Valued Taxpayer' letter from the IRS that wants you to substantiate your gambling activity, you won't be able to do that unless you have kept track.
A small casual win in your office pool probably will not raise any red flags with the IRS. But if you won a bet that was placed at a casino or with one of the on-line sources, you had better get your records in shape.
As with everything else IRS related, the rules for tax deductions and tax credits are not always black and white. Consult with your tax professional or call Performance Advisors to help you compute maximum deductions and credits for your 2011 taxes. Contact Performance Advisors today at 602-579-5725 or email Performance Advisors today for ideas and assistance.
Don't Overlook These Tax Breaks
From the Recovery Act, HIRE Acts, and Affordable Care Act:
1. A New Small Business Health Care Tax Credit
2. A New Tax Credit for Hiring Unemployed Workers
3. Bonus Depreciation Tax Incentives to Support New Investment
4. 75% Exclusion of Small Business Capital Gains
5. Expansion of Limits on Small Business Expensing
6. Five-Year Carryback of Net Operating Losses
7. Reduction of the Built-In Gains Holding Period for Small Businesses from 10 to 7 Years to Allow Small Business Greater Flexibility in Their Investments
8. Temporary Small Business Estimated Tax Payment Relief to Allow Small Businesses to Keep Needed Cash on Hand
From the Small Business Jobs Act:
9. Zero Capital Gains Taxes on Key Investments in Small Businesses
10. The Highest Small Business Expensing Limit Ever- Up to $500,000
11. An Extension of 50% Bonus Depreciation
12. A New Deduction for Health Care Expenses for the Self-Employed
13. Tax Relief and Simplification for Cell Phone Deductions
14. An Increase in The Deduction for Entrepreneurs' Start-Up Expenses
15. A Five-Year Carryback Of General Business Credits
16. Limitations on Penalties for Errors in Tax Reporting That Disproportionately Affect Small Business
And from the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act:
17. 100 Percent Expensing
"Nobody likes taxes, but they've been around forever. Taxes date back all the way back to the year one, when baby Jesus was visited by two wise men and an IRS agent, who demanded half the family's frankincense." -Jimmy Kimmel
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