Deduct Gambling Losses on Your State Taxes
This Article is for Gamblers
Gamblers, whether professional, habitual, or just casual players, have a few things in common. First, they occasionally win. But also, they occasionally finish the year with a net loss from wagers. Still, they all must prepare federal and state tax returns showing their gambling winnings.
Most gamblers know that on your federal tax return, in many cases the IRS will allow you to offset your gambling losses with your winnings. In other words, the IRS expects to tax your gambling income, but will reduce that income by the amount of your losses.
Don’t forget that gamblers can deduct losses only to up to the amount of their winnings.
For state tax returns, however, that treatment is not always available. Some states (including Illinois) do not allow gamblers to deduct their losses at all. In that case, they may have significant tax liability on their state tax return from their gambling winnings. That harsh rule does not apply to every state.
There is a strong legal argument that tax attorneys can make to deduct those gambling losses at the state level. The IRS now allows “Safe Harbor” treatment as an alternate way to calculate your day-to-day net winnings more fairly.
Using this Safe Harbor method, gambling income from slot machine wagering and possibly even online gaming is determined on a “Session” basis. The thought process is simple. The calculation is much more complex. Also, that legal argument may require those gamblers to take a different approach to their gambling losses on their federal tax return. (It could possibly increase your federal tax.) Only take this position through your tax attorney or experienced tax professional.
What about online betting?
There is new excitement, even a new industry around online casinos and sports betting with popular platforms like DraftKings, FanDuel Bet MGM and Rivers. There is an entirely new population of people now with gambling income.
For those who receive W-2G Forms showing your gambling winnings, don’t panic. You are still entitled to the same tax treatment as if you walked right into a casino and made wagers in person. Make certain that you maintain statements from your online accounts, so that you may always access your gaming activity. It is very important to have a complete, accurate, and therefore reliable report of your winnings, but also your losses. Your tax attorney will need those reports.
Settlements for Taxes Related to Gambling
There is one more thing to consider. Can you make a settlement to resolve state or IRS tax balances due?
Yes, you can. But it is not as simple as it might seem.
When seeking a payment arrangement for taxes related to gambling winnings, the government is always interested in your ability to pay back the taxes. One special item that the government considers is the amount of money that you still spend monthly gambling.
There is the occasional opportunity to argue that gambling is an allowable expense, but only to a certain degree. But be cautious: That argument is extremely sensitive and should never be made casually or frivolously. Only make this argument after consulting with a tax attorney experienced with gamblers.