Understanding Gambling Income and Losses Essential For a Tax Preparation Business

October 29, 2011 by  Filed under: Taxes 

Although tax returns affected by gambling income comprise a minority, tax preparers must possess thorough understanding of the matter. Each year, almost every paid tax preparer encounters at least one person with reportable income from gambling activity. This is an inevitable consequence of the extended presence of legal casino gaming in areas throughout the country.

The tax preparer exam contains questions to assure that tax practitioners are aware of how to report gambling winnings. In addition, online continuing education courses reinforce understanding of the deduction for gambling losses.

Record keeping by amateur gamblers varies considerably in quality. But IRS and tax court rulings provide some guidance about the steps a tax preparer may follow for gambling losses without running afoul of registered tax return preparer ethics.

The IRS treats amateur gamblers differently than professionals. Anyone regularly engaged in gambling to profit as a career is entitled to treat the activity as a business. Alternatively, occasional gambling as personal entertainment is miscellaneous income.

For either amateur or pro, gaming establishments will issue a W-2G to anyone with winnings of at least $600. The IRS gets a copy too. A tax practitioner with an RTRP education knows to report the income in distinctive ways depending upon whether the gambler is an ordinary amateur or qualifies as a professional.

Gambling winnings are reported as miscellaneous income for an amateur. Only the professional gambler subtracts expenses – including gambling losses – and reports net winnings on Schedule C. Amateur gamblers are entitled to deduct gambling losses only as itemized deductions on Schedule A. For the amateurs, the maximum deduction for gambling losses is the amount of gambling winnings reported.

However, the IRS has rules allowing casual players to merely maintain a record of net winnings or losses for each gambling session. Consequently, amateur players should report the sum of winning sessions as miscellaneous income and the total of losing sessions as an itemized deduction – up to the amount of winnings.

Amateur gamblers should not provide tax preparation services with records of only net winnings for all sessions combined. When records are this casual, tax preparers should at least obtain any W-2G reporting significant gross winnings.

The IRS guidelines for gambling records stipulate that taxpayers should record the date and type of each wagering activity along with the name and address of the gaming establishment. Professionals and amateurs alike usually track the amount won or lost by recording changes in their amount of casino credit or chips purchased and redeemed.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for paid tax preparer and tax professionals. Access to free questions for the tax preparer exam is available on their website.

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