Gambling/Tax Question

[Z²+]

I have a question for the intelligent tax people here at FOFC. I've done a moderate level of research over the past two days and have yet to come up with an answer, I'm hoping a poster here might have some experience or be able to point me in the right direction.

This past weekend, I won a (free entry) slot tournament at the Taj Mahal in Atlantic City -- grand prize $25,000. Of course I was excited, but now the reality has set in that I'm going to have to pay a large chunk of that to the gov't. Now, I've worked at a casino for the past 5 years and am quite familiar with the W-2G and the concept of claiming gambling losses to offset a large gambling win. However, because this was a free slot tournament for invited guests, and there was technically no wager I suppose, I have an inkling that I am going to be stuck using Form 1099 MISC. If that's the case, can I still itemize gambling losses to offset the prize money? I mean, I was playing a slot machine, and it was at a casino, and common sense would appear that it was a form of gambling I was partaking in. I'd hate to think I'll lose X thousand dollars this year at the casino and still have to pay full taxes on my big win at the casino.

Additional information that may be pertinant. I'm a full time student, this was going to be my first year as a non-dependant anyway, and my income WAS going to be projected well under the standard dedection (ie, no taxes for me). Any idea how I can potentially save a few thousand dollars here? I'd like to invest the whole 25k and not end up with 15k or so in March.

Thanks for any help guys, I really appreciate it.

[Philliesfan980]

Originally Posted by Z²+

I have a question for the intelligent tax people here at FOFC. I've done a moderate level of research over the past two days and have yet to come up with an answer, I'm hoping a poster here might have some experience or be able to point me in the right direction.

This past weekend, I won a (free entry) slot tournament at the Taj Mahal in Atlantic City -- grand prize $25,000. Of course I was excited, but now the reality has set in that I'm going to have to pay a large chunk of that to the gov't. Now, I've worked at a casino for the past 5 years and am quite familiar with the W-2G and the concept of claiming gambling losses to offset a large gambling win. However, because this was a free slot tournament for invited guests, and there was technically no wager I suppose, I have an inkling that I am going to be stuck using Form 1099 MISC. If that's the case, can I still itemize gambling losses to offset the prize money? I mean, I was playing a slot machine, and it was at a casino, and common sense would appear that it was a form of gambling I was partaking in. I'd hate to think I'll lose X thousand dollars this year at the casino and still have to pay full taxes on my big win at the casino.

Additional information that may be pertinant. I'm a full time student, this was going to be my first year as a non-dependant anyway, and my income WAS going to be projected well under the standard dedection (ie, no taxes for me). Any idea how I can potentially save a few thousand dollars here? I'd like to invest the whole 25k and not end up with 15k or so in March.

Thanks for any help guys, I really appreciate it.

Well, since you won't be itemizing (unless you give most of that money to charity), you won't get the benefit of any gambling losses. Since you're in such a low income bracket, I'd just pay the tax, it won't be as much as you think.

You could always open an IRA and save some cash.

[Farrah Whitworth-Rahn]

Originally Posted by Z²+

I have a question for the intelligent tax people here at FOFC.

Well then I won't need to be needed...

[QuikSand]

I don't think there's any doubt that your winnings are taxable as gambling income. I strongly suspect that you will need to approach tax time armed with your documentation for the gambling losses deduction, and will then have to do a two-part calculation to see if you are ultimately better off itemizing and deducting losses or just going with the standard. Sounds like you'll end up in a somewhat tough spot, where you probably won't be getting the full value of the deduction, as a practical matter.

Congrats on the win, anyway.

[Z²+]

Originally Posted by QuikSand

I don't think there's any doubt that your winnings are taxable as gambling income. I strongly suspect that you will need to approach tax time armed with your documentation for the gambling losses deduction, and will then have to do a two-part calculation to see if you are ultimately better off itemizing and deducting losses or just going with the standard. Sounds like you'll end up in a somewhat tough spot, where you probably won't be getting the full value of the deduction, as a practical matter.

Congrats on the win, anyway.

That was my original thought. However, after spending two days reading help web sites and the IRS website, I have the uncomfortable feeling that the "winnings" won't be considered "gambling winnings".

To quote the Tax Calandar on irs.gov,

Form 1099 MISC - Miscellaneous Income - Prizes and awards that are not for services performed. Include the fair market value of merchandise. Also include amounts paid to a winner of a sweepstakes not involving a wager.

My gut feeling, untrained in the skilled art of taxation and tax law (at least until this upcoming spring semester), tells me that since my win isn't classified as a W2-G "Certain Gambling Winnings", that I won't be allowed to claim any gambling losses against it - so I'll have to pay taxes on the entire $25k, and not for example 25k minus 10k in documented gambling losses or whatever it turns out to be.

I'm still happy, just trying to hold onto every dollar I can in the end.

[QuikSand]

Fascinating. Keep us posted.

If you're right, then it might turn out that your current income stratus is actually good news rather than bad, as I had expected. Odd twist.

[Surtt]

Originally Posted by Z²+

10k in documented gambling losses

If you have 10k in documented losses, do you have any unreported winnings to go along with it?

I would report the 25k as a prize, not winnings, and let sleeping dogs lay.

[ThunderingHERD]

Originally Posted by Z²+

and not for example 25k minus 10k in documented gambling losses or whatever it turns out to be.

You don't make enough to have to file taxes yet you have lost 10k gambling?

[Honolulu Blue]

Congratulations on the big win!

Anyway, the way I see it:

1) Your win is taxable, of course.
2) There's not a lot of difference between declaring it as a prize or gambling, unless you have enough gambling losses to consider itemizing (see below).
3) The '05 standard deduction will be about $5k, so you need itemized deductions above that to declare them on Schedule A. Examples include state & local income taxes, property taxes, charitable contributions, and yes, gambling losses. You'll need to prove those losses - a statement from the casino would be good, a diary with dates & wins/losses would work OK.
4) The federal tax bite isn't going to be that bad - about $2000 I'd estimate on just the win, plus 15% of whatever other income you have.
5) Putting the money in an IRA is a very good idea if you're sure you won't need the money right away. See your financial advisor for more details.
6) Don't forget those state & local taxes.

[Z²+]

Originally Posted by Honolulu Blue

Congratulations on the big win!

Anyway, the way I see it:

1) Your win is taxable, of course.
2) There's not a lot of difference between declaring it as a prize or gambling, unless you have enough gambling losses to consider itemizing (see below).
3) The '05 standard deduction will be about $5k, so you need itemized deductions above that to declare them on Schedule A. Examples include state & local income taxes, property taxes, charitable contributions, and yes, gambling losses. You'll need to prove those losses - a statement from the casino would be good, a diary with dates & wins/losses would work OK.
4) The federal tax bite isn't going to be that bad - about $2000 I'd estimate on just the win, plus 15% of whatever other income you have.
5) Putting the money in an IRA is a very good idea if you're sure you won't need the money right away. See your financial advisor for more details.
6) Don't forget those state & local taxes.

Thanks, very helpful stuff! I am meeting with a financial advisor next week to clarify a few things, now I can go in knowing what I'm talking about (sort of ) and not seem like a dullard. My initial plan is just to put the whole thing in a short term CD to get some crappy interest over the next few months, pay the tax man, then get seroius with the full amount. My losses may be close to the standard deduction, but I won't know until end of calandar year.

Originally Posted by ThunderHERD

You don't make enough to have to file taxes yet you have lost 10k gambling?

Just an example. I might be hovering around the decuction amount, but hopefully I'm nowhere close to 10k.

[Leonidas]

I seem to recall reading somewhere that you can only claim gambling losses for a deduction if you list yourself as a professional gambler because you can only deduct expenses going towards your earned income. And I am pretty darn certain if you claim winnings as prizes there's no way you can deduct losses.

I think this came from an interview with David WIlliams I read. He talked about hiring an accountant and the biggest advice the guy gave him was to list his profession as professional gambler so he could take full advantage of the deductions.

[QuikSand]

Originally Posted by Leonidas

I seem to recall reading somewhere that you can only claim gambling losses for a deduction if you list yourself as a professional gambler because you can only deduct expenses going towards your earned income. And I am pretty darn certain if you claim winnings as prizes there's no way you can deduct losses.

I think this came from an interview with David WIlliams I read. He talked about hiring an accountant and the biggest advice the guy gave him was to list his profession as professional gambler so he could take full advantage of the deductions.

This is misleading.

If you declare gambling winnings, you are entitled to deduct gambling losses, up to the amount of your declared winnings, regardless of your stated profession.

If you declare your profession as a gambler, then you become entitled to an additional range of deductions, essentially paralleling the "business deductions" afforded to people in other lines of work. If you are, more or less, a professional gambler, it makes sense to declare it so on your tax forms. If you just happen to have a big hit or a nice side stream of income from gambling, then there's probably no advantage to you declaring that way, as you still get your losses decuted regardless.

[QuikSand]

Originally Posted by ThunderingHERD

You don't make enough to have to file taxes yet you have lost 10k gambling?

You might be surprised at how rapidly the taxpayer's evidence shows up for monumental gambling losses once he has to declare and potentially pay tax on some winnings. It's uncanny.

[stkelly52]

Get married and adopt 7 kids before the end of the year. Then your standard deduction will rise to the point where you won't have to pay any taxes on the $25,000.

[kcchief19]

Or do what I'm sure 99.9 percent of the people who cash in on a big prize or gambling winnings do -- thumb your nose at society by not reporting it all and bury your head in the sand thinking you'll never get caught.

[kcchief19]

Originally Posted by QuikSand

You might be surprised at how rapidly the taxpayer's evidence shows up for monumental gambling losses once he has to declare and potentially pay tax on some winnings. It's uncanny.

My mother was once in a bowling league where everybody in the league would buy $5 worth of lottery tickets and scratch them off together with the understanding that if anyone won big all the other people in the league would give them their losing tickets as evidence of "gambling losses."

[QuikSand]

Originally Posted by kcchief19

Or do what I'm sure 99.9 percent of the people who cash in on a big prize or gambling winnings do -- thumb your nose at society by not reporting it all and bury your head in the sand thinking you'll never get caught.

This is why the government requires reporting (and sometimes withholding) on substantial gambling winnings.

[Z²+]

Originally Posted by QuikSand

This is why the government requires reporting (and sometimes withholding) on substantial gambling winnings.

Exactly. I'm quite positive the casino will be reporting this to the IRS, since they did take down all my information, so I would never try to hide it.

As for the losses, I know I can request a statement from the casino telling me my exact win/loss on the slots (when using my card) and an estimated win/loss while playing table games. I figure that will be proof enough to claim any losses.

I do wonder how they compute losses on slots, however. I know when they calculate your LEVEL OF PLAY (for things like cash back, comps, card status, etc.) they go by the "coin played" approach - ie, if you put in a $20 dollar bill, and play off that bill for over an hour, winning and losing and winning and losing etc., you may have lost only $20 at the end, but "played" off several hundred dollars of play. Are losses calculated the same way? If I put in a 20, win 500 on my first spin (non-taxable since under the $1200 limit), and then proceed to play off the entire 500, did I lose $20 for tax purposes, or $500? If the latter, then it will be much easier to accrue gambling losses to offset the win (that's IF I'm allowed to offset a sweepstakes win with gambling losses - verdict is still undecided on that it seems).

And alas, I was advised to also start saving losing lottery tickets and picking up discarded racing tickets at the track. Not sure if I'll stoop that low, unless I see substantial savings in my future.

More updates as they unfold......and thanks for the continued discussion.

[Surtt]

Originally Posted by Z²+

As for the losses, I know I can request a statement from the casino telling me my exact win/loss on the slots (when using my card) and an estimated win/loss while playing table games. I figure that will be proof enough to claim any losses.

You are only looking at half the picture.

Everything you win is taxable income, everything. There is no $1200 limit. Under the current law the casino is not required to report winnings under $599. So if you win less then this, you can put it in you pocket and the IRS is non the wiser, but legally you should to report it and pay taxes on it. If you turn over to the IRS your slot records you are going to be taxed for every winner, every $2, every $5, every winner. What you choose to do with the winnings, such as put it back into the machine, is immaterial. It is not how much you end the night with, it is how much comes out of the machine.

Sure you can show $10,000 in losses, but you will show (I'm guessing) $8,000 in additional taxable income.

[yabanci]

At least you won't be as screwed as this guy:

Contest Winner Declines
'Free' Airline Tickets

By MELANIE TROTTMAN and RON LIEBER
Staff Reporters of THE WALL STREET JOURNAL
July 6, 2005; Page B1

One winner of a recent American Airlines contest says he would have been better off losing.

The contest, launched as part of the airline's We Know Why You Fly marketing campaign, awarded free tickets to travelers submitting the best videos, essays or photographs about their flying experiences. The grand prize winners were offered 12 round-trip restricted coach tickets for two from the U.S. to anywhere in the world American flies. In exchange, American has the right to use the winning materials for promotional purposes.

The contest's fine print explains that winners must pay federal and state income taxes, where applicable, on American's "approximate retail value" of the 12 round-trip tickets for two, which the airline valued at $52,800, or $2,200 per ticket.

Jack McCall, a New York resident who won American's grand prize in the video category by submitting a video montage of snapshots he and his wife collected during their travels around the world, estimates that federal, state and local taxes on the prize could amount to roughly $19,000, given the couple's probable federal tax bracket and because they live in New York City, where income taxes are high. That's equivalent to about $800 for each of the 24 tickets.

And in today's cut-rate airline pricing environment, American's valuation is far more than a winner would likely pay if he or she simply bought the tickets. The result: The tax bill could be higher than the tickets actually sell for.

"I don't know where they got that $2,200 from," says Mr. McCall. "I've never spent more than $1,000 for a plane ticket in my life." Mr. McCall, who is declining the prize, says he could do far better purchasing them himself.

AMR Corp.'s American said the grand prize was valued at $52,800 because the IRS requires it to value the prizes and file 1099 tax forms at their "maximum potential value." An American spokesman says the formula for setting that value "has consistently been used for a long time," and is based on a range of potential itineraries, including the most distant international destinations. "It certainly includes some tickets that might be more expensive than the ones" Mr. McCall ultimately could have used, the spokesman said.

The same formula is used to determine the value of free travel given to outside directors. But in those cases, American opts to pay the taxes itself because the tickets are included in compensation packages. Employees, including executives, who travel free of charge, aren't liable for income taxes on the value of the flights.

The contest has certain restrictions. The vouchers must be used by the winner and a guest, according to contest rules, and travel must be completed within 12 months. That leaves little time, especially for more costly and time-consuming international trips.

The tax consequences of American's contest are similar to what winners can face in other contests, including television game shows or sweepstakes. The difference is that the plane tickets are nontransferable, according to the contest rules, and the winner can't sell the prize to settle the tax bill. Last fall, 276 audience members on the Oprah Winfrey show won Pontiac G6 General Motors Corp. cars valued at $28,500 apiece. Winners could decline the prize, accept the car and pay the taxes, or immediately sell the car and get the difference in cash (and pay taxes on that). At least one couple who won two cars sold one to pay student loans.

Valuing plane tickets also isn't nearly as straightforward as valuing, say, a new car or stereo, since coach fares on the same flight can vary broadly depending on ticket restrictions, dates of travel and how far in advance a ticket is bought.

While Mr. McCall saw the $52,800 valuation figure in the fine print of the contest rules before he entered, he says he didn't understand that the number would be treated like income, since it wasn't a cash prize.

Since winning, Mr. McCall says he discussed his problem with both American and its contest administrator. American offered him alternatives, including the choice of fewer vouchers. Those trips, however, would still be valued at their maximum potential value, and Mr. McCall declined the offer.

Contest winners do have alternatives, according to tax experts. Those who don't agree with the way a company has valued a prize can submit an alternative price with their tax returns, says Martin Nissenbaum, the national director of personal income tax planning for Ernst & Young LLP in New York. He once had a client who won a stereo on "Jeopardy!" that the show valued at $2,000. His client saw an advertisement with a much lower price and sent the Internal Revenue Service the ad with her return to support the lower valuation. It often helps to submit an expert opinion; one from a travel agent would help in Mr. McCall's case, Mr. Nissenbaum said.

Mr. McCall says he was aware of the possibility of challenging American's valuation of the vouchers on his tax return, but he thought that tactic was too risky. "The problem with that is that if the IRS didn't buy it, I'd be" in trouble, he says. "And if I report something different than what American does, that's a red flag for an audit. And who wants to be audited by the IRS?"

Nora Butler, an IRS spokeswoman, says an audit wouldn't necessarily result from such a return. Still, she said the agency might need further clarification. "The best option for a person in this situation is to try to work it out ahead of time" with the company giving the prize away, she says.

http://online.wsj.com/public/article...s_free_feature