Tax Q&A | True or False: Tax questions about gambling activitiesThe recent local election results have generated increased discussion about gambling activities in our area. Many taxpayers have preconceived notions about the tax issues related to these activities that are not quite accurate. Here is the truth behind several commonly-believed falsehoods.
False: I do not have to report gambling income if my losses exceed my winnings.
True: Regardless of the amount of losses you have, you must report your gambling winnings on your personal tax return. The income received from gambling activities is taxed at ordinary income rates.
False: I never have to pay any tax if my losses exceed my winnings.
True: You can deduct gambling losses up to the amount of your winnings on your tax return. However, these deductions are claimed as miscellaneous itemized expenses. In other words, if a taxpayer does not itemize deductions, he or she gets no tax benefit from the gambling losses.
False: Gambling losses may be limited because of the 2% limit on miscellaneous deductions.
True: In this case, the tax rules actually work in your favor. Generally, you can deduct miscellaneous expenses only to the extent that the total for the year exceeds 2% of your adjusted gross income. However, certain types of miscellaneous expenses, including gambling losses, are deducted without applying this limit.
False: I don’t have to pay federal income tax on any lottery payoffs or similar type of winnings from charitable organizations.
True: Tax-exempt organizations such as charities are required to meet the same reporting and withholding rules as other entities providing lotteries, sweepstakes and other forms of gambling. The payor must generally report winnings of more than $600 to the IRS.
False: If I gamble online, I do not have to pay tax on my winnings.
True: Although there have been no definitive rulings from the IRS, the basic rules that apply to gambling at other venues also apply to online gambling activities. Therefore, you must report your online gambling winnings on your personal tax return. In turn, you may be able to offset the tax liability with gambling losses, assuming you itemize deductions.
The tax rules related to gambling activities vary by state, so please call us if you have questions. We will be glad to help.
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