IRS Audit, IRS Audit Process

Powerball and the IRS

December 6, 2012 - IRS Audit, IRS Audit Process

Did you buy a ticket? Did your ticket win? It’s all that was on the news lately! I live in Arizona. One of the two BIG winning Powerball lottery tickets was sold right here in Fountain Hills. I’ve been past that corner many times. But the winner does not live in Arizona. He lives in Maryland. (We saw him verifying his ticket on the TV news.) There are more than the two big winners. I don’t know how many smaller winners there are across our nation. Powerball is a multistate lottery game. It is played in 42 of our 50 states plus the US Virgin Islands. $508 Million. FIVE HUNDRED AND EIGHT MILLION DOLLARS!!! How many hours would you stand in line to buy a ticket? Some people from California and from Nevada and stood in line over three hours just to get inside the little store on the border that sells the tickets. We play Powerball in Arizona, but they don’t offer this game in those neighboring states.   The Decisions In Arizona the winner does not have to agree to go “On TV” but their name and city of residence must be revealed. Will these rules apply to the Maryland resident who purchased his ticket while driving by? Within 180 days, he must come back to pick up his winnings, present his ticket, and present his identification to collect his prize. Will he choose the cash payout? Or will he choose an annual check every year for 20 years? What would you choose? You get more money if you choose the 20-year payout. It’s like money from a second job. You can count on it to cover expenses. You can spend it. You can save it. You can invest it. You can make it work for you. You can share it.   The Tax Liability The winnings are taxable. They WILL withhold taxes from your check or checks. A winner in 2010 won $44 MILLION Dollars. From that he had $11,000 withheld for federal taxes and $3,000 withheld for his state taxes. That sounds like a lot, but $11,000 out of $44,000 is only 25%. Did your ticket win less than the grand prize? Did you buy a ticket with a group of people? Do you know how to protect your share of that kind of group ticket? If I were part of a “gambling” group I’d want to have a copy of all of the tickets purchased for the group. Or at least a record of the numbers on each of the tickets I was co-owner of. If you were the one buying the tickets for the group would you also buy a ticket for your family? If so, you want to be sure to keep your personal ticket separate from your group ticket. (That sure sounds like needing to keep your personal expenses separate from your business expenses, doesn’t it?)   The Losing Tickets: Tax Deductible? And what do you do with the tickets that don’t win? Do you know you need to document your gambling losses if you want to deduct them? Would deducting the losses matter if you won $44 million dollars? They say you can’t win if you don’t play. And I am not promoting gambling. I’m just helping you know the rules so you cam play this “tax game” to win. The Internal Revenue Service says you can deduct your losses to the extent of your winnings. If you don’t win, you cannot deduct your losses. If you won $100 for the whole year and you lost $200 for the whole year, how much can you deduct? $100 is the amount of that single year’s losses that you could deduct against that single year’s winnings of $100. BOTH numbers must be reported. They go on different places of your tax return. IRS also says you can’t deduct if you don’t keep a gambling log. You log can be as simple as a calendar with dates, names of places you gambled, the types of games your played, and the dollar amounts of how much you walked in with and how much you walked out with. Keeping your gambling log is required if you want to deduct your losses. Another part of your required documentation would be a shoebox (or envelope or other convenient container) of losing tickets for the year. Don’t just throw them in the box. I recommend you keep them in a nice stack in date order. Paper clip, staple, rubber band, or use anything you like to organize these critical receipts. Chances are (more gambling talk) you will need them if you are audited for your gambling activity. To find out more about Gambling Winnings, Losses and the IRS, see this blog post: IRS Audits of Gambling Winnings and Losses To your lowest legal tax, Nellie T Williams, EA