- Playing the lottery is considered a type of gambling by the IRS, so the tax rules that apply to gambling also apply to lottery winnings and losses. If you happen to win money gambling, your winnings must be reported as taxable income to the Internal Revenue Service. The IRS states that you must include your gambling winnings as income on Form 1040, line 21. However, the IRS states that you can deduct gambling losses for a given year on line 28 of Schedule A of Form 1040.
- Gambling losses are an itemized tax deduction. When you file your federal tax return, you have the option of choosing a standard tax deduction or itemizing your deductions--but not both. If the sum of all of your eligible itemized tax deductions does not exceed the standard deduction you are eligible for, you will do better by accepting the standard deduction. According to the IRS, the standard deduction was $5,700 for single taxpayers on 2009 returns. You can deduct gambling losses only if you choose to itemize your deductions.
- The ability to deduct gambling losses can lessen the financial impact of buying lottery tickets, but the gambling tax deduction is limited by your winnings. According to the IRS, "you cannot deduct gambling losses that are more than your winnings." For instance, if you spend $500 on lottery tickets over the course of a year and only win $50, you can only deduct $50 of your losses. Considering that winning even small amounts when playing the lottery is unlikely, there is a good chance that you will not be able to deduct any of your lottery losses.
- You must keep detailed records of your gambling if your plan to deduct gambling losses on your tax return. According to the IRS, "to deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses."
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