NEW YORK (CNNfn) - So what happened? You rolled snake eyes at the crap table? Bet a wad of cash on a horse that couldn't win a race with a two-day head start and a chauffer-driven limo?|
Whatever the reason, you were hit by some sizeable gambling losses and you want to claim them as deductions. Fine -- but don't gamble with your tax return. You need to have accurate records of your losses or you could be dealing yourself a royal pain.
If you want to deduct your gambling losses, you can only claim them to the extent of your winnings. For example, if you win $5,000 gambling and you lose $10,000, you may only deduct $5,000. This differs from capital losses, which, unlike gambling, are viewed as investments.
On the record
Gambling is big business, with Americans wagering $630 billion in 1998 and losing $54.3 billion. However, in spite of the large numbers, the American Gaming Association (AGA) reports that the dramatic increases from 1993 to 1995 have slowed recently.
Lotteries remain the most popular form of gambling, the association reported, followed by casino gambling, sports betting pools, and casino gambling on Native American reservations. Bingo fills the No. 5 slot.
With all this activity, someone's bound to lose some time -- even you. And if you want to deduct you gambling losses, you have to itemize.
"You have to declare your winnings," said John Shelk, vice president of the AGA. "There is a misconception on the part of some taxpayers and gambling critics that this is some giant loophole, that some big loss is going to offset my salary. It's just not true."
The Internal Revenue Service reports that in the 1997 tax year, there were 36.6 million returns with itemized deductions, with about 561,000 claiming gambling losses totaling about $5.13 billion. The total number of itemized deductions added up to $620.81 billion.
"If you don't itemize your deductions, you're basically out of luck," said E. Kim Dignum, a certified financial planner in Fort Worth, Texas.
Gambling establishments must report large winnings to the IRS, so keeping track of your losing efforts is critical, otherwise you will not be able to deduct them. Whether it's receipts, a diary or losing tickets, you will need something to prove your losses besides your honest face. And the better your record- keeping, the better it is for you.
"The best advice is to keep good records. If you don't have them, don't scramble to pick up loose tickets with the footprints on them."
-- Don Roberts, IRS
"The more substantial your records are, the stronger your case is," said IRS spokesman Don Roberts. "You're building a foundation on your records. In the end, you have to be able to support the deduction."
If you keep a diary of your gambling activity, include as much information as possible. Dignum suggests you record such information as:
- The date, time and type of wager
- The name and address of the gaming establishment
- The people you were with and, of course, the amount you won and lost
"The trouble is people don't start to worry about this until they win," Dignum said. "You need to be optimistic and assume in January that, by gosh, I'm going to win and go ahead and keep an accounting (log)."
If you do not have proper evidence to support a gambling reduction, the IRS will disallow it. Trying to intentionally defraud the government can be a real losing hand and the penalty could be as high as 75 percent of the original tax.
"The best advice is to keep good records," Roberts said. "If you don't have them, don't scramble to pick up loose tickets with the footprints on them."
When it comes to gambling of any kind remember these two little words: watch it. You may think gambling could never be a problem for you, but compulsive gambling experts have heard this line many times.
"We see compulsive gamblers of all sizes and shapes," said Edward Looney, executive director of the Council on Compulsive Gambling of New Jersey.
Looney said SMR Research Corp. of Hackettstown, N.J., reported that counties with more than one gaming facility are more likely to have a significantly above-average rate of personal bankruptcies.
The average debt for people who contact the council for help has grown while their average income continues to shrink, Looney said. In 1998, the average gambling debt was $38,000, while the average income was $36,000.
And while some may argue, Looney expands the definition of "gambling" to include day trading, since, he said, the compulsive gambler and the compulsive day trader share many characteristics.
"We're using the word 'gambling' more often now," Looney said.