One of the gifts that my in-laws always pass out at Christmas time are sets of lottery tickets. After the gift exchange is complete we all grab a quarter and some newspaper to catch the “ticket confetti” that we create when scratching for hidden treasures. I remember one year that one of the kids actually scratched off a $50 prize and then proceeded to accidentally throw the ticket away with the used wrapping paper. It is rare that anyone ever wins big dollars. When everyone is done scratching off mostly worthless tickets, we are instructed to pass back in the worthless paper. Why would we not just throw these in the trash? Taxes my friend.
You see, lottery and gambling winnings are taxable. Remember that $50 winning ticket? The entire house was put on lock down and all trash bags were searched once we realized it had been thrown away. We actually found that ticket and the winner turned it in for $50 but had to add it to their taxable income for the year. That makes sense. Most income is taxable. But did you know that you may be able to deduct gambling losses against that income if you itemize? That’s right, if you keep some sort of proof that the IRS accepts, you may be able to use your worthless ticket purchases to reduce the amount of taxes that you owe from the winning ticket. Those used tickets with no prize value were being used to offset winnings.
So what are my three tips for your gambling fun?
The odds are against you. You may write it off as entertainment expense and as long as you can afford it and stay within your budget that may be OK. However, for me, knowing that I am going to throw away more income than I get back in winnings is just not a good way to throw money away.
When you walk into a casino what do you notice? I see loads of money to build beautiful places that feed you free drinks, discounted food and high-dollar suites when you dump your hard earned money into their cause. The bottom line is that most of the games are tilted in the casino’s favor. Surprise. If you must gamble, try doing things that have better odds. Learn poker and play against other players instead of the house.
If you are lucky enough to win something big enough the casino or state may be required to withhold income taxes at the same time you get a payout. Most of us will only win small amounts so it is up to us to report the income and pay the tax. Don’t forget this part. At the same time, reduce your tax bill legally by arming yourself with the knowledge of the law by saving your receipts and losing tickets to potentially use to offset any winnings that you make throughout the year.
The thrill of the hunt for big winnings is fun. Just don’t let it overtake you…and don’t forget that Uncle Sam wants his piece too.
*The opinions expressed in this post are those of the author and not necessarily those of United Capital Financial Advisers, LLC.
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