I came across a new Wisconsin Tax Bulletin release the other day and thought I would share with you how states are being much more aggressive in demanding their share of tax from gambling winnings.
If you are a resident of the state of Wisconsin and receive a form W-2G for gambling winnings, you are taxable on those winnings when you file your return. Now, if you gambled in Iowa and received form W-2G (assuming it was a large enough amount), you must file a return in Iowa, report your winnings, and then claim an offset on your Wisconsin tax return for any tax paid to Iowa. In most cases, you will not pay extra tax, but you will be required to file an extra return.
The unique part about taxation of gambling winnings is that you can only offset gambling losses against gambling winnings based upon the net winnings from a "gambling session." Each gambling session is treated as a separate taxable event, and if you have a net loss in one session, you cannot offset any of that net loss against your net winnings.
For example, let's assume you go to a Wisconsin casino in the morning, sit down at a slot machine, take one spin of the wheel and hit the jackpot for $10,000. You decide to cash in and go golfing for the rest of the day. That evening, you go back to the casino, take your $10,000 and start to play the slots. You have a bad night of it and end up losing the full $10,000 plus another $5,000.
In the eyes of the state of Wisconsin (and most likely other states), you are taxable on the $10,000 won in the morning and cannot deduct any of the net loss of $5,000 in the night session. So you are out of pocket $5,000 plus Wisconsin taxes on the $10,000 winnings, which could easily be $1,000.
This can add up to a lot of extra state taxes at the end of the year, even if you lost money gambling during the year.
The key thing about this notice and others like it is that if you gamble infrequently, you probably do not need to worry about it too much. However, if you gamble on a regular basis, the IRS and each state you gamble in will want their "fair share," and maintaining adequate records of your gambling sessions is very important.