Are gambling losses deductible?

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Q. I’ve recently started gambling online — don’t worry — it’s just with “fun money,” not with funds I need for my expenses. When are losses deductible – or winnings taxable – and is it different for federal and New Jersey?
— Lucky fingers

A. When it comes to any kind of income — gambling winnings included — it’s important that you work with a tax preparer who knows your entire financial situation so you can properly assess what deductions you can take.

Here’s some of what you should discuss with your tax preparer.

Gambling losses are deductible to the extent of winnings on your federal return, but only if you itemize deductions and only to the extent you report gambling income, said Karl Graf, a certified financial planner and certified public accountant with Modera Wealth Management in Westwood.

“In short, no net gambling losses are deductible,” he said. “Gambling income includes winnings from raffles, lotteries, horse races, casinos and the fair market value of prizes.”

To substantiate losses, Graf said, you should keep betting slips, canceled checks losing lottery tickets, etc.

In addition, he said, the IRS recommends keeping a detailed diary of your gambling activity as evidence of losses and winnings. Note that you are required to report all gambling winnings, not just those that have been reported to you (and the IRS) on Form W-2G.

Gambling winnings and losses are treated in the same manner for New Jersey tax purposes as for federal income taxes, Graf said.

However, there is an exception related to New Jersey lottery winnings.

“All New Jersey lottery winnings of $10,000 and below are exempt from New Jersey income taxes,” Graf said. “Only NJ lottery winnings that exceed $10,000 in a single win are subject to New Jersey income taxes.”

He offered this example: If you won $7,000 and had another win of $12,000 during the year, only $2,000 would be subject to New Jersey taxes ($12,000 minus $10,000).

Graf said losses from other gambling activities can be used to offset the taxable portion of your lottery winnings as well as any other gambling winnings. Note that all winnings from other state lotteries are fully taxable in New Jersey, he said.

“In addition to providing supporting evidence of your winnings and losses a diary of gambling activities, it can also serve as a useful tool to help you maintain awareness of the frequency and extent of your gambling and alert you to any subtle (or not so subtle) changes in your gambling behavior,” Graf said

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This post was first published in June 2016.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.