Guess Who's Checking Your Poker Hand

IRS rules require you to report both -- not the net after subtracting your losses or other costs, but all of it. You put the winnings on a specific line on the front of Form 1040 -- it was line 21, "other income," for 2004 returns, though forms may change from year to year -- and that results in your total winnings being included in your gross income, and ultimately your adjusted gross income.

You enter your losses separately as a miscellaneous deduction on Schedule A.

This arrangement has several unhappy consequences for taxpayers.

First, if you don't itemize deductions, you pay tax on all the winnings and get no offsetting write-off from your losses. This can hurt students and other relatively low-income people who would normally take the standard deduction.

Second, if you do itemize, you can deduct losses or other costs only up to your winnings. If you lost more than you won, you get no tax help with those extra losses. You can write off associated costs, such as admission to gambling establishments, food, lodging and the like, but they are subject to the same limit.

In fact, various complimentary items, such as meals and lodging, that a gambler receives "to induce him to gamble" may be considered income, the IRS says.

Third, even if you do itemize and even if you have enough losses to wipe out the tax on your winnings, those winnings may still serve to inflate your adjusted gross income because the winnings get added in early in your calculations but the losses do not get figured in until later.

A higher AGI can trigger various phaseouts and limitations that hurt your bottom line. For example, thresholds for taxation of Social Security benefits are based on AGI. So are limits on eligibility for deductible IRA contributions or contributions to a Roth IRA.

In addition, at an AGI of about $145,000 itemized deductions begin to phase out. Gambling losses are exempt from this phaseout, but winnings, by pushing AGI higher, can cause the phaseout of other deductions, boosting taxable income.

Finally, gambling losses are subject to IRS challenge, just as any deduction is. And while the payer may report your winnings, it is not likely to report your losses. So it's up to you to keep good records.

The IRS recommends you keep a log, with dates, amounts and locations noted. But the log alone won't do it. You should also hang onto receipts, tickets and any other papers that would back up your log.

That may be a hassle, but it's worth it. The tax treatment of gambling is tough enough. Don't get your legitimate deductions disallowed for lack of records.

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The Internal Revenue Service is reminding teachers and other educators to save their receipts when they buy books or other classroom supplies. Up to $250 of such expenses is deductible from this year's taxes. And the deduction is available whether or not the taxpayer itemizes deductions on Schedule A.

The deduction is available to educators in public or private elementary or secondary schools. To be eligible, a person must work at least 900 hours during the school year as a teacher, instructor, counselor, principal or aide.