Casino jackpot and taxes

[BJC]

So I won $9100 at a poker bad beat jackpot.  Besides losing money to compensate,  how can I ease the tax burden?

[Kakashi]

I'm assuming the Casino issued you a 1099?  Or took down your information with a plan to issue a 1099. 

Other than the standard means of lower income (ira's, hsa's, etc.), you can't get rid of tax this burden.  The only way as you alluded to is to lose 9100.00 in gambling which means your net income in gambling is 0.  But what's the point of winning money?

[MDM]

So I won $9100 at a poker bad beat jackpot.  Besides losing money to compensate,  how can I ease the tax burden?

One of the classic items at Bogleheads: Reducing Taxes

[jp_b]

My friend is an avid poker play and wins big time to time.  He always refuses to give the Casino his SSN which they would use to report to the IRS on the payout.  It's always an argument with the Casino but eventually they give in because they want you to continue playing there. 

[Kakashi]

My friend is an avid poker play and wins big time to time.  He always refuses to give the Casino his SSN which they would use to report to the IRS on the payout.  It's always an argument with the Casino but eventually they give in because they want you to continue playing there. 

I think it's different if you win a jackpot, vs if you just win.  If you just win, and cash out money, the casino can't track what your "cost basis" is.  But I think for a jackpot (or a tournament win), they are required to report on a 1099 if it's above $1200. 

[SnackDog]

Do you have to document your losses somehow or just write them on the 1040?

[Cathy]

My friend is an avid poker play and wins big time to time.  He always refuses to give the Casino his SSN which they would use to report to the IRS on the payout.  It's always an argument with the Casino but eventually they give in because they want you to continue playing there.

The federal income tax is a tax on income. 26 USC § 1. Whether or not the payor issues a Form 1099 (or other tax form) has no effect on whether the amount constitutes gross income within the meaning of 26 USC § 61(a). The tax treatment of amounts received is determined by applying the provisions of Internal Revenue Code, not by reading numbers off a form. A taxpayer cannot rely on information returns such as Form 1099 and Form W-2 if the information on the forms is "inconsistent with ... the taxpayer's knowledge of the transaction". 26 CFR 1.6664-4(b)(1).

If an amount is received without an information return being issued, or if the information return is incorrect and does not include the full amount received, it may be easier for the taxpayer to commit fraud if the amount is otherwise taxable, but the taxpayer's actual liability will not be reduced. There is no statute of limitations for the IRS to assess tax owing "[i]n the case of a false or fraudulent return with the intent to evade tax". 26 USC § 6501(c)(1).

As noted below, I express no view on any specific situation.

[Frugalman19]

Jackpots are not considered gambling winning so you cannot use losses to offset the gains. Gambling winnings usually come over on a W-2g, where jackpots come over on a 1099 like normal income.

[sokoloff]

I would wager (pun intended) that a case could easily be sustained for a poker bad beat jackpot to be gambling income and a taxpayer to be able to use gambling losses to offset. The argument would include that the player was only entitled to the jackpot as part of his play, and that he relied on the jackpot EV as part of the wager terms for his losses.

Are slot machine jackpot winners not able to offset their slot machine play losses against the jackpot?

Absent a specific ruling to the contrary, I'd certainly file this way.

[powskier]

it doesn't matter! You were just given FREEish money. Put aside 38% max  for taxes and enjoy the rest of your life.

[plog]

If only there was a governmental agency in charge of federal income taxes. It would be even better if this hypotehtical agency had some sort of document that  addressed this specific event.  Hell, why we are wishing for the sky, let's go so far as wish that document was accessible without even leaving our homes.

https://www.irs.gov/taxtopics/tc419.html

 
So, it turns out you can minimize the taxes on these winnings if you itemize your 1040.  You will be able to deduct losses up to your winnings.  So, you can itemize, say you lost the exact amount as you won and not have to pay taxes on it.  Then, you cross your fingers and hope you don't get audited. 

But even if you do, no big whoop.  You can request your players history from all the casinos you visited and they are happy to give it.  Those players cards track slot play and table buy-ins which allow you to have evidence as to your losses.  Also, you have 40 days left in 2016 to get to a horsetrack and scoop up losing tickets.  Shove those in a shoe box and if you get audited you have evidence that you lost a ton of money on the ponies.

[braje]

Do you have to document your losses somehow or just write them on the 1040?

Losses go on your schedule A (itemized deductions)

[Derbtax]

Braje has an important point. There are a few disadvantages to taking the deduction:

First, your winnings raised your AGI. That can phase you out of credits, most of which phase out at certain AGI levels, even if your tax is offset by the deduction.

Second, you have to itemize your deductions. Your standard deduction, if married, is 12,600. Unless you have a variety of other deductions, you may normally take the standard deduction. The gap between your potential itemized deductions and  the standard deduction is lost deduction space - you get no benefit until you're over the standard.

Third, you can only deduct an amount up to gambling winnings. Any additional losses give no tax benefit.

Fourth, you have to have losses. Which kind of eliminates the advantage to winning in the first place.