Ask the Slot Expert: Deducting losses from slot winnings

John:

I really enjoy reading your advice and you're on the money most of the time. However, on December 26, 2012 you were asked about taxes being withheld from a slot jackpot and I think you failed to mention that you can deduct your losses from your winnings and most of the time not pay any taxes at all on smaller jackpots lower than $2,000. Just keep a record of your losses each time you visit a casino.

I remember one time I spent $1,500 to hit a $1,600 jackpot and paid no taxes.

Am I wrong in my thinking?

Jim

Jim,

Thanks for the kind words.

Deducting losses from slot jackpots isn't as easy as you describe. If slot jackpots were treated like business income, we would report our net winnings. So, if we were down $1,500 when we hit $1,600, we would report our true profit, $100.

But slot jackpots don't work that way. The IRS gets paperwork about certain winnings only. To pass the test that matches the income you declare with the income reported to the IRS, you have to declare the total of your W-2Gs as income on your 1040.

To deduct losses, you have to report them on Schedule A and you must itemize deductions and not take the standard deduction.

Keeping a record is good advice. The IRS website says that "it is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses."

Jackpots for all,
John

Always enjoy your sage advice and plain talk on slot gaming. When you win a large jackpot that is annuitized over a period of years, in year one you can deduct losses against winnings. In year two, since that is a year you are paying taxes on the second year's allotment, can you deduct losses on that year as well?

I've never had the pleasure of hitting a jackpot that was paid in an annuity, but here's how it works.

When you get your jackpot paid from an annuity, you get a W-2G for each payment. Gambling losses have to be deducted in the year in which they are incurred. You'll have to deduct all the money you lost going after that big jackpot in year one.

In year 2, you get another check and another W-2G. You can deduct any gambling losses you had in year 2 because you had reportable gambling winnings in year 2. The same goes for each year in which you get an annuity payment.

Jackpots for all,
John