Any participation in a gambling activity will result in either a win or a loss. Gambling winnings are always taxable, and whether from a casino, a lottery or a contest, the IRS will get its share of taxes due. Losses, however, are deductible on your federal taxes, although the rules may dampen your enthusiasm for the gambling losses deduction.
Gather all forms necessary to calculate the deductible loss. These documents will include the W-2G, all losing lottery tickets and any other documentation regarding any gambling losses. Whether it be a casino, a race track, lottery or a contest, the payer of any winnings must provide a Form W-2G to the winner with an identical copy filed with the IRS.
Calculate the fair market value of the win. Some winnings will not be in cash. You may win a vehicle, a boat or another item of substantial value. Most of the W-2Gs will have this fair market value on the actual form. If you do not receive a W-2G, you are still required to claim your winning. Search for the fair market value by using either a blue book for vehicles or search for the comparable values of items that are identical to or similar to the one you won.
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Add up all the gambling losses you incurred throughout the year. Subtract the total of the losses from the total of the winnings to reduce your taxable liability. You can only deduct your losses up to the amount of your winnings. If you won $5,000 and lost $6,000, you may only claim the $5,000 in losses, which zeros out your liability. You cannot carry over the remaining amount to a following year nor use it to reduce taxable liability on other sources of income.
Itemize your deductions. You may only deduct gambling losses if you itemize the rest of your return. You must use Form 1040 for your return, not 1040EZ or 1040A. Report gambling winnings on Line 21 of Form 1040 and the gambling losses on Line 28 of Schedule A on the 1040.
If you are audited, you will need to provide proof of the losses in the form of receipts, tickets, statements or other records. In addition, it is helpful to keep a written diary of all winnings and losses and the dates of both.