Gambling professionals who earn a profit may qualify for the pass-through tax deduction established by the Tax Cuts and Jobs Act. This deduction permits business owners to deduct up to 20% of their net business income from their income taxes. The deduction took effect in 2018 and is scheduled to last through 2025. You can report as much as you lost in 2019, but you cannot deduct more than you won. And you can only do this if you’re itemizing your deductions. If you’re taking the standard deduction, you aren’t eligible to deduct your gambling losses on your tax return, but you are still required to report all of your winnings. Recent tax law changes turned a bad situation worse. The higher standard deduction means fewer people will benefit from deducting gambling losses since you need enough itemized deductions to exceed the standard deduction before the gambling losses reduce your tax liability. Then we have issues with state tax returns. In this scenario, your tax savings thanks to being able to deduct the interest on your mortgage debt would be $2,500. The higher your tax bracket, and the more interest you pay on your debt, the. Per IRC § 165(d) the deduction for gambling losses has been limited. For tax years beginning before 2018, a professional gambler could deduct all trade or business expenses incurred in gambling activities, and could deduct gambling losses up to the amount of gambling winnings.
The IRS views winnings from gambling as taxable income, but did you know that you’re allowed to deduct gambling losses, too? While losing money at a casino or the racetrack does not by itself relieve your tax burden, it can reduce taxes owed for your other winnings, ultimately saving you money.
How to know if you can deduct your gambling losses
Gambling loss deductions save you money by reducing your taxable income. But there’s a trick to this—you can’t claim gambling losses that exceed your winnings, as losses are inextricably linked to your winnings for tax purposes. If you have no winnings to claim, you can’t deduct your losses.
As an example, let’s say that in a given year you went gambling twice, winning $6,000 in one instance, but losing $8,000 in another. In this case, you can only deduct $6,000 from that $8,000 loss. The remaining $2,000 in losses can’t be carried forward or written off. Conversely, if you won more than you lost, you’d owe taxes on the difference between your winnings and losses as “other income”—but at least those taxes would be reduced.
(If you’re a full-time, professional gambler the requirements are different: you will report your earnings like they have resulted from a business, as self-employed income).
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How to claim gambling losses
Deductible gambling losses can result from online casinos, poker games, sports betting, lotteries, prize draws, horse and dog racing, and even your office fantasy sports pool. To report any of these gambling losses, you’ll be required to itemize your deductions. This makes sense if the total of all your itemized deductions exceeds the standard deduction ($12,400 for taxpayers who are single or are filing separately from their spouse). If you claim the standard deduction, you don’t get the opportunity to reduce taxes for winnings owed by deducting gambling losses.
Keep in mind that you must be able to substantiate any losses you’re claiming, which means you’ll need to keep records of your gambling.
Track your winnings and losses
You can’t just say “I lost a bunch of money gambling” to the IRS. They require you to provide records of your winnings and losses to back your claim. Therefore, you should keep track of:
- the date and time of your gambling session
- the type of gambling
- the name and location of the gambling venue
- the people you gambled with
- how much you bet, won and lost
You should also keep credit cards statements, payout slips, receipts, tickets, bank withdrawal records, and statements of actual winnings. Other documentation can include:
Gambling Debt Tax Deductions
- Form W-2G (typically given or mailed to you by casinos after a big payout)
- Form 5754 (a form for when you’re part of a group that earns money through gambling; you might see one of these if you and your co-workers are cashing in a winning lottery ticket)
Gambling Debt Tax Deduction Deductions
Do you or someone you know need help with a gambling problem? Call the National Problem Gambling Helpline Network (1-800-522-4700).