Can I Deduct My Gambling Losses on My Tax Return?

Most people in the office create a pool of money to play the state lottery.

In our office, we normally play when the jackpot prize is big. In January 2006, our group of 18 people won a decent prize by getting 5 out 6 numbers in the California Super Lotto. The number that we missed is the mega number 25- we picked (well it was actually a quick pick) the number 23. The prize money for this is $24,500 and each one of us received a total of $1,361. There is a 25% federal tax that was withheld automatically so the prize money netted out to around $1,020 for each person. There are no state tax since the State of California is the lottery organizer.

As you know, this is considered gambling winnings and should be reported when you file your income tax return. The question is can I deduct some of my gambling losses to offset this winning to at least get some of the taxes that was withhold?

Gambling losses are deductible but only up to the amount of the winnings. So if you win the lottery, you can deduct some of the losses such as your total ticket purchase. Also, the losses are not limited into one type of gambling. You can deduct other types of gambling losses such as casino table, horse racing tickets, sports bets, scratchers, keno tickets, or bingo tickets to offset your winnings.

So in our case, even though we did not purchase $1,000 worth of lottery tickets, but if I lost $500 from the casino and another $500 in horse racing, then I can report $1,000 losses in my tax returns. However, you need to be able to substantiate your losses. So always keep those ticket stubs, or if you lose money playing cards on the casino table, you should always ask for receipt of your losses. You’ll never know if you’ll win big someday and you might need to offset some of those winnings.

For us it was really the right timing because our winnings happened at the beginning of the year and we have more time to collect and keep track of other losses if we do other forms of gambling. Also, you just don’t gamble and lose some of those money just to get the deduction. This is only beneficial if you are a big gambler and you have some winnings and losses consistently during the year.

What section of the tax return do I report the winnings and losses? Gambling losses are only deductible if you are ITEMIZING. Meaning you have to have mortgage interest, property tax, medical expenses, or other miscellaneous expenses to report that exceeds the standard deduction. The standard deduction in 2006 is $10,300 for married couple and $5,150 for a single person.

The correct way to report winnings and losses in your tax return is to report your winnings on the income section, which is line 21 of the 1040 Schedule and the losses on Schedule A as a miscellaneous expense (not subject to the 2% limitations). You don’t subtract the losses directly to your winnings and report only the net amount.

A different rule applies to a professional gambler. If you are a professional gambler, you can deduct your losses directly to your income, just like when you’re running a business where your business expenses are deducted against your revenues. So on your tax return you can report just the net amount on the income section of 1040. Please keep it mind that The IRS has its own way of determining who’s a professional gambler and the definition normally are determined on a case by case basis. I’m sure that those avid gamblers want to find out how they can be considered a professional gambler. If you think you are, you should always consult your tax practitioner (CPA or an Enrolled Agent) to ensure that you do qualify as a professional gambler and you can deduct those expenses directly to your income.