Also see: IRS Issues Proposed Rules on Winnings from Electronic Slot Machines.

CPA Sample Client Letter: Reporting Gambling Winnings and Losses.

(Parker Tax Publishing March 23, 2015)

Dear [client name]:

I understand you have engaged in numerous gambling transactions and are concerned with the tax reporting of your gains and losses.

Assuming you are a recreational gambler (i.e., you are not in the trade or business of being a professional gambler), you are required to report the full amount of your gambling winnings (with no reduction for gambling losses) for the year as income on Form 1040, and then deduct your gambling losses (up to the amount reported as gambling winnings) for the year separately on Schedule A, Itemized Deductions, as a miscellaneous itemized deduction. Such gambling losses are not subject to the 2 percent floor. If you are filing a joint return for the tax year, you and your spouse's combined gambling losses are deductible to the extent of your combined winnings. Gambling losses in excess of winnings are not deductible.

On the other hand, if you qualify as a professional gambler, you can deduct your gambling losses up to the amount reported as gambling winnings as an above-the-line deduction in arriving at adjusted gross income, rather than as an itemized deduction. This limitation, however, does not limit deductions for expenses incurred to engage in the trade or business of gambling. A professional gambler's business expenses are not "losses from wagering transactions" subject to the deduction limitation. Thus, expenses such as telephone and internet charges, automobile expenses, ATM fees, etc. could be deductible business expenses for a professional gambler.

In order to deduct your losses and business expenses, you must keep an accurate diary or similar record of your winnings, losses and expenses. You should maintain a diary which should contain at least the following:

(1) the date and type of the specific wager or wagering activity;

(2) the name and address or location of the gambling establishment;

(3) the names of other people present with you at the gambling establishment; and

(4) the amounts won or lost.

You should also have other documentation in addition to a diary. You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings; Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment.

For specific wagering transactions, you can use the following items to support your winnings and losses:

(1) Keno: Copies of the keno tickets you purchased that were validated by the gambling establishment, copies of your casino credit records, and copies of your casino check-cashing records.

(2) Slot machines: A record of the machine number and all winnings by date and time the machine was played.

(3) Table games (twenty-one (blackjack), craps, poker, baccarat, roulette, wheel of fortune, etc.): The number of the table at which you were playing and casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage.

(4) Bingo: A record of the number of games played, cost of tickets purchased, and amounts collected on winning tickets. Supplemental records include any receipts from the casino, parlor, etc.

(5) Racing (horse, harness, dog, etc.): A record of the races, amounts of wagers, amounts collected on winning tickets, and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.

(6) Lotteries: A record of ticket purchases, dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winnings statements.

Please call me at your earliest convenience if you need more information or would like to discuss your particular situation.

Sincerely,

[Your Name, Your Firm]

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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