I recently won a lump sum gambling out of state. Must I itemize my taxes next year to be able to deduct my gambling losses? Also, does it matter from which state my gambling losses come?
Yes and no.
Yes, you must itemize on Schedule A in order to take a deduction for gambling losses. Gambling losses count as a miscellaneous deduction , but are not subject to the 2% of adjusted gross income limitation that affects most miscellaneous deductions. The limitation that does affect gambling losses is that you can only deduct losses to the extent that they don't exceed the gambling winnings for the year.
For example, if you won $10,000 gambling and spent $12,000 on gambling over the course of the year, your deduction is limited to $10,000. The extra $2,000 doesn't carry over to any other year, you will never get the benefit of a deduction for the extra $2,000.
Likewise, you can't stockpile losses from several years in order to offset your gambling winnings. If you lost $5,000 in 1996 and $2,000 in 1997 and $6,000 in 1998, your gambling loss deduction for 1998 is going to be a maximum of $6,000. The amounts from prior years are only deductible to the extent you had gambling winnings in those years in the amount of the losses.
No, it doesn't matter in which state you were gambling when it comes to deducting losses. You can gamble in several different states, leaving a trail of losses behind you as you go, then enjoy winnings all from one state, and you still get to deduct the losses from all the other states.
It also doesn't matter if your gambling winnings are from one type of gambling and the losses from another type. You may hit it big at the blackjack table, but throw it all away at the race track. All losses from all sources are combined when calculating your tax deduction, and all winnings from all sources are combined when calculating the income.
There are some factors to keep in mind when planning to report gambling winnings and deduct gambling losses.
Report all winnings, not just the big jackpot that the IRS already knows about because the casino sent in a W-2G form on your behalf. Gambling winnings include winnings from lotteries and raffles. The winnings don't have to be in cash to be included in your income. If you win a car, a house, a television, a boat, a diamond ring, or even something small in value like a set of dishes, you must include in your income the fair market value of the item won. Remember that the IRS is interested in illegal winnings and losses as well as the legal kind.
If you are married, the gambling winnings and losses of both spouses are combined for tax purposes. If she has the golden touch and he is the one who keeps throwing it away, his losses can offset her winnings.
The IRS recommends that you keep a written diary of your gambling experiences. Not only can this be an eye-opener for the person who swears, "I don't really gamble very often," but it can provide the evidence you need to convince the IRS of the validity of your deduction. Include the date and location of each of your gambling activities, the type of game or wager, the amount won and/or lost, and the names of any other people who were there with you.
In addition to a diary, keep betting tickets, canceled checks, or any other written documentation to verify your participation in the gambling event. Also keep travel records to the extent that you traveled to participate in the gambling activity. This can include hotel bills, restaurant receipts, and transportation records. Keep bank records that support your gambling, such as cancelled checks, and bank deposits.
The gambling establishment that hosted your gambling activity should withhold tax if your winnings exceed $5,000. If you have winnings on which tax is not withheld, be aware of the fact that you may be liable for quarterly estimated tax payments, both to the IRS and your state government. In fact, if you live in a state (such as Indiana) that doesn't allow itemized deductions, your state tax will be affected by the entire amount of your gambling winnings with no provision for offsetting the winnings with gambling losses. Rather than wait and catch up with your taxes in April when you file your tax returns, it's best not to gamble that the IRS or your state government will be forgiving. Estimate how your tax liability will be affected by the results of your gambling, and pay quarterly taxes when necessary