Gambling Winnings Are Excluded From Gross Income
Jan 03, 2020 Gambling winnings are fully taxable and you must report the income on your tax return. Gambling income includes but isn't limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips. Must include the gross amount of their gambling winnings for the year in gross income -taxpayers are allowed to deduct their gambling losses to the extent of their gambling winnings, but the losses are usually deductible as miscellaneous itemized deductions - professional - losses are deductible to the extent of gambling winnings - for AGI. 86–780, § 5, Sept. 14, 1960, 74 Stat. 1013, provided for the exclusion from gross income of any amount received after Dec. 31, 1949, and before Oct. 1, 1955, by employees of certain corporations as reimbursement for moving expenses, and the refund or credit of any overpayments.
Gross Income
The IRS's Office of Chief Counsel (OCC) advised that gambling winnings that a taxpayer surrenders to a state as part of a program intended to help treat gambling addiction do not have to be reported by a casino to the taxpayer on Form W-2G, Certain Gambling Winnings, and are not includible in gross income by the taxpayer.
Background
A state, through a state agency, has established what is called a Voluntary Exclusion Program (VEP) as a means of treating gambling addiction. The state is not named in the chief counsel advice (CCA), but several states run similar programs, including California, Illinois, Indiana, Iowa, Kansas, Maryland, Missouri, New Jersey, Ohio, Oklahoma, and Pennsylvania.
Under the program discussed in the CCA, a participant enters into a written contract with the state under which the person voluntarily agrees to not enter a state casino. Under the terms of the contract and state administrative code, a VEP participant, who in violation of the contract enters a state casino, agrees to surrender any jackpot or thing of value won as a result of a wager made at the casino. The casino pays the winnings not paid to the VEP participant to the state for use in fighting gambling addiction.
An individual can enter into the state's VEP for a period of one year, five years, or for life. If the individual elects to participate for one or five years, he or she must affirmatively request to be removed from the program after the end of the term. However, an individual may not request removal from the VEP if he or she enrolls in the program for life. If a VEP participant enters a state casino, makes a winning wager, and then tries to claim the winnings, the casino will inform the participant that his or her name is on the VEP participant list, and the casino will not pay him or her any winnings. The participant is then supposed to be escorted from the casino. This treatment applies to slot machine jackpots and winnings from table games.
Questions for the OCC
The OCC was asked to answer two questions regarding gambling winnings that are not paid to a person because he or she is a participant in a VEP:
- Is a casino required to issue a Form W-2G to an individual who wins a slot machine jackpot or has winnings from a table game but is not paid the winnings because he or she is a participant in a VEP?
- Are winnings not paid to an individual because he or she is a VEP participant includible in gross income?
Mass Gambling Losses
W-2G Reporting
Under Sec. 6041, a casino is, in general, required to report payments of winnings to gamblers of $600 or more in a tax year. Under Regs. Sec. 7.6041-1(a), if a casino makes a payment of a jackpot of $1,200 or more from a slot machine, it must report the payment on an information return. Under Regs. Sec. 31.3406(g)-2(d)(3), a casino is required to report gambling winnings (other than winnings from bingo, keno, or slot machines) if the amount paid with respect to the wager is $600 or more and the proceeds are at least 300 times as large as the amount wagered.
The OCC advised that the obligation to file an information return for winnings from a slot machine or table game requires a payment of winnings to a person. Thus, a casino is not required to issue a W-2G to an individual who had gambling winnings but is not paid the gambling winnings because he or she is a VEP participant. However, if a taxpayer does receive some of his or her winnings despite being a VEP participant, the information-reporting requirements will apply to those winnings.
Income Inclusion
The OCC explained that under Sec. 61, gross income includes all income from whatever sources derived. Under the assignment-of-income doctrine, which was first set forth in the Supreme Court's decision in Lucas v. Earl, 281 U.S. 111 (1930), a taxpayer cannot assign income he or she earns to another taxpayer to avoid taxation on that income. However, the doctrine does not apply where the taxpayer disclaims, waives, renounces, or otherwise abandons any and all interests in the right to receive the income before it is earned, and the taxpayer does not direct, or retain the ability to direct, the disposition of the income after it is earned and payable.
The OCC concluded that a situation where an individual was denied gambling winnings due to participation in a VEP fell under this exception to the assignment-of-income doctrine. The OCC reasoned that by participating in the state VEP, the gambler is repudiating his or her right to any of the winnings before he or she earns or is paid any of the winnings. The fact that the taxpayer surrenders the winnings to the state does not give rise to an assignment of income because the taxpayer is not directing the payment of the winnings to another person. Rather, pursuant to state law and as reflected in the terms of the state VEP agreement the taxpayer entered into before he or she realized the winnings, the winnings the taxpayer renounces must be paid to the state. However, the OCC cautioned that if an individual received gambling winnings despite being a VEP participant, the amount he or she received would be included in gross income.
Reflections
Gambling And Taxes
VEPs are designed to help gambling addicts get control of their problem by keeping them out of casinos and removing any financial incentive to gamble. Based on the case law of the assignment-of-income doctrine, the OCC's reasoning in the CCA is sound, and given that a taxpayer does not become a VEP participant out of tax motives and receives no benefit from any winnings a casino turns over to the state, it would be a perverse policy to tax him or her on the winnings. Because the winnings are not paid to the taxpayer or includible in his or her gross income, it would also make no sense to require casinos to report the income on Form W-2G.
CCA 201433015 (8/18/14)
The law requires you to report all (or nearly all) income-- even if you obtained it illegally.
Most of us have heard the tale of Al Capone, a notorious American gangster who ran an organized crime ring during the Prohibition Era of the 1920s. The story usually ends with the fact that although Capone was believed to have orchestrated several gangland slayings, the government prosecuted-- and ultimately jailed him-- for tax evasion.
This story is often used as a cautionary tale to remind taxpayers that regardless of how you make your money, the government's only concern is that you pay taxes on it. Well, not exactly. What's true is that the IRS does want you to report all income so that it can collect taxes on it, and there is an entire booklet devoted to spelling that out for you.
Gambling Winnings Are Excluded From Gross Income. Quizlet
The flip side is that while the IRS is not likely to check your occupation to see if you listed 'drug dealer' or 'embezzler,' it does cooperate with law enforcement if asked for taxpayer information as part of criminal investigations.
IRS Publication 525 (Taxable and Non-Taxable Income) contains a long list of 'other income' that taxpayers may not know about-- some of them having to do with illegal, or at least questionable, income. For example:
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· Bribes. If you receive a bribe, include it in your income.
· Found property. If you find and keep property that does not belong to you that has been lost or abandoned (treasure trove), it is taxable to you at its fair market value in the first year it is your undisputed possession.
· Gambling winnings. You must include your gambling winnings in your income on Form 1040, line 21. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings. If you are in the trade or business of gambling, use Schedule C. Additional rules apply for lotteries, raffle and installment payments.
· Illegal activities. Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.
· Kickbacks. You must include kickbacks, side commissions, push money, or similar payments you receive in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.
· Stolen property. If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner.
It should also be noted that there are certain forms of income that can be excluded from gross income, but you would not want to be in a position to take advantage of these exceptions. For example:
· Certain amounts received by wrongfully incarcerated individuals. Certain amounts you receive due to a wrongful incarceration may be excluded from gross income.
· Terrorist attacks. You can exclude from income certain disaster assistance, disability, and death payments received as a result of a terrorist or military action.
What's more important here is not so much what income you can exclude from your tax return, but what you must include, whether legal or otherwise. This raises the obvious question 'who would admit to ill-gotten gains?' Very few, to be sure. But if caught for illegal activity, at least the government would not have the additional charge of tax evasion.