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Just because I'm in the middle of tax season I figured I'd throw this out for those of you who might like to hit the casino from time to time.
As you are probably aware, casinos issue a form W-2G when you win over a certain amount of money (different games have different thresholds). You are probably also aware that you are allowed to deduct from income your gambling losses up to the amount of your winnings. You may even be aware that you are required to report ALL of your winnings, not just the jackpots that get you the W-2G for. What most people are not aware of, though, is how "all of your winnings" is calculated.
Let's say that you plug $100 into a slot machine and play 101 at $5 a game. You lose most of the games but along the way you win $200 on one spin and $10-50 on a few spins and get even money on a bunch of others. After 101 games you have played your credits back down to $100 and cash out. You do this regularly and never really win or lose too much. In your mind you are probably thinking that you haven't won anything. I mean you put $100 in and took $100 out so you're all even...right?
Well, let's say you get audited and the Compliance Officer wants to see verification of your losses so you get a copy of your slot club statement that properly shows more losses than winnings. You think you're solid gold. Then the TCO does something unexpected. He says "Mr. Taxpayer, this statement shows that you won $20,000." Your eyes get big and your heart starts pounding but then you realize that the statement also shows your losses so you say, "Well, I guess so but I also have $20k in losses so if you want me to claim 'all' the winnings I will and then I'll just claim 'all' the losses and we'll end up in the same place."
"Mr. Taxpayer, I would like you to claim all the winnings." says the TCO. "I will also allow you to claim all the losses but I'm afraid we aren't going to end up in the same place. You see, you also collected Social Security (or certain credits) and the rate at which that is taxed is based on your Adjusted Gross Income which is now $20k higher so you owe us tax on that extra income (or lose the credits)."
Ladies and gentlemen, the auditor would be correct in doing this and it could cost certain taxpayers a lot of extra money. I won't go in to all the scenarios where it can mess you up but if you are collecting Social Security and have a relatively small pension or other income you are in the "sweet spot" for this kind of thing and I suggest that you watch out for it. So far this year I have had a handful of clients already who had W-2G's for less than $10k but their slot club reports have so far all showed well into the 6 figures of total winnings.
Just one more thing to think about. If you are working and covered by a retirement plan with your employer (401k or such) and your spouse is not AND you generally make contributions to an IRA for your spouse, a situation like the above may end up making that IRA contribution non-deductible thus giving you a 'basis' in your IRA which you will need to be aware of as it will change the taxable amount of your distributions when you turn 70 ½.
-edit-
Just to add some perspective to this.
Let's say that John and Jane Doe are both retired. John gets a pension of $25k and Social Security of $25k. Jane gets Social Security of $10k. They get a W-2G for $5000. They don't itemize. Their tax would end up being roughly $1700 if they only reported the $5k in winnings. If, however, their slot club statement showed $150k in total winnings the total tax hit would be closer to $6k because 85% of their Social Security would be treated as taxable.
As you are probably aware, casinos issue a form W-2G when you win over a certain amount of money (different games have different thresholds). You are probably also aware that you are allowed to deduct from income your gambling losses up to the amount of your winnings. You may even be aware that you are required to report ALL of your winnings, not just the jackpots that get you the W-2G for. What most people are not aware of, though, is how "all of your winnings" is calculated.
Let's say that you plug $100 into a slot machine and play 101 at $5 a game. You lose most of the games but along the way you win $200 on one spin and $10-50 on a few spins and get even money on a bunch of others. After 101 games you have played your credits back down to $100 and cash out. You do this regularly and never really win or lose too much. In your mind you are probably thinking that you haven't won anything. I mean you put $100 in and took $100 out so you're all even...right?
Well, let's say you get audited and the Compliance Officer wants to see verification of your losses so you get a copy of your slot club statement that properly shows more losses than winnings. You think you're solid gold. Then the TCO does something unexpected. He says "Mr. Taxpayer, this statement shows that you won $20,000." Your eyes get big and your heart starts pounding but then you realize that the statement also shows your losses so you say, "Well, I guess so but I also have $20k in losses so if you want me to claim 'all' the winnings I will and then I'll just claim 'all' the losses and we'll end up in the same place."
"Mr. Taxpayer, I would like you to claim all the winnings." says the TCO. "I will also allow you to claim all the losses but I'm afraid we aren't going to end up in the same place. You see, you also collected Social Security (or certain credits) and the rate at which that is taxed is based on your Adjusted Gross Income which is now $20k higher so you owe us tax on that extra income (or lose the credits)."
Ladies and gentlemen, the auditor would be correct in doing this and it could cost certain taxpayers a lot of extra money. I won't go in to all the scenarios where it can mess you up but if you are collecting Social Security and have a relatively small pension or other income you are in the "sweet spot" for this kind of thing and I suggest that you watch out for it. So far this year I have had a handful of clients already who had W-2G's for less than $10k but their slot club reports have so far all showed well into the 6 figures of total winnings.
Just one more thing to think about. If you are working and covered by a retirement plan with your employer (401k or such) and your spouse is not AND you generally make contributions to an IRA for your spouse, a situation like the above may end up making that IRA contribution non-deductible thus giving you a 'basis' in your IRA which you will need to be aware of as it will change the taxable amount of your distributions when you turn 70 ½.
-edit-
Just to add some perspective to this.
Let's say that John and Jane Doe are both retired. John gets a pension of $25k and Social Security of $25k. Jane gets Social Security of $10k. They get a W-2G for $5000. They don't itemize. Their tax would end up being roughly $1700 if they only reported the $5k in winnings. If, however, their slot club statement showed $150k in total winnings the total tax hit would be closer to $6k because 85% of their Social Security would be treated as taxable.
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