8. Gambling Losses (Up to Winnings)

This may seem like a surprising deduction, but it is a legitimate one that applies to many people who enjoy trips to the casino, playing bingo, or buying lottery tickets. The rule is simple, but often misunderstood.

You Can Deduct Losses Only Up to the Amount of Your Winnings

You cannot deduct more in losses than you won during the year. For example, if you won $2,000 from various casino trips but lost $3,000 over the course of the year, you can only deduct $2,000 of your losses. You cannot use the extra $1,000 loss to reduce your other income.

How to Report It

This is where people make mistakes. You must report your winnings and losses separately. Your total winnings for the year are reported as “Other Income” on your tax return. If a single payout was large enough, you might receive a Form W-2G from the casino or lottery.

Your losses are then reported as an itemized deduction on Schedule A. You cannot just subtract your losses from your winnings and report the net amount. Because you must itemize to claim the losses, this deduction is only useful if your total itemized deductions exceed your standard deduction.

The Need for a Diary

The IRS requires you to keep a detailed log or diary of your gambling activity to substantiate your losses. This should include the date, the type of gambling, the location, and the amounts you won and lost. Keeping tickets, statements, and receipts is also crucial.