1099k from Paypal, gambling transaction questions

[spiff1972]

Hello,

I am going to use rounded off numbers here to keep things simple...

I received my first 1099K from Paypal this year, and I have a few questions.

The 1099K is in the amount of $38k.  I have not received any W2g forms from any sites because I have never had a single win large enough to trigger one to be generated.  I live in Michigan if that is useful info.

I have a spreadsheet where I track every deposit to these casino sites and every withdrawal from these  casino sites.  According to this spreadsheet, my total deposits were $42k and total withdrawals were $44k (net winnings of $2k).  There is ONE site that doesn't take PP, so that site makes ACH deposits and withdrawals from my bank account (not PP account).  This one was therefore not reported on 1099k since it was outside of the PP system (total of 5900 in and 6400 out - net gain 600).

My assumption is that the withdrawals of $44k exceeds the 1099k amount of $38k because I would often leave the funds received from casino sites in the PP account and make further deposits to casino sites from that PP balance.  The transactions outside of PP also contributed to this difference.

So my question is how to deal with this?  From reading other similar posts on this community forum, it looks like it has been suggested that you would enter the 1099k data, and then enter a negative misc income representing the deposits ($42k)?  This isn't accurate, as it would make it look I had a net loss of $4k.  

Since I have no W2Gs, it seems to me that the more accurate way to represent the gambling winnings/losses is to enter the 1099k info, zero it out with a negative misc income (label it "1099k correction - gambling win/loss reported separately"), and then from my spreadsheet, enter the total deposits as gambling losses, and the total withdrawals as gambling winnings.  This would correctly reflect the net gain of $2k for the year.

All the above applies to federal taxes (assuming I itemize).  Michigan tax law doesn't allow "casual" gamblers to reduce their AGI by gambling losses at all, so this 1099k threw me for a loop.  It seems I will end up paying 4.25% tax on $37k (or possibly $44k based on real transaction data?)  This seems like a nail in the coffin of online casinos in michigan when people start realizing the tax implications.  I won a total of $2000, and will pay tax of $1570-$1870 making it hardly worthwhile (looks like a tax rate of over 75%).   Had I "broke even" on the year, I would have come out $1500 in the hole...

EDIT: I did some more digging about the michigan tax code, and it looks like they changed it to allow for losses to offset winnings.  So may be OK there!

[spiff1972]

Update: 

After a bit more digging, it appears that the state of Michigan has changed their tax code to reflect that of the federal codes, where losses DO offset winnings...

But my question still stands for HOW to address this in TT...

[Cynthiad66]

@spiff1972

The computation is performed on the federal return and as a result, the information accurately rolls to the state return.

To report your gambling losses, you must itemize your income tax deductions on Schedule A. You would typically itemize deductions if your gambling losses plus all other itemized expenses are greater than the standard deduction for your filing status.

Use this link for additional information:  Reporting Gambling Losses

[spiff1972]

Sorry that last post of mine made my question unclear.  The main part of my question was how to reconcile the 1099k against my spreadsheet of all my deposits and withdrawals from the casino sites.

1. Is the spreadsheet sufficient documentation?  I will not get any W2G forms from any sites because I never won enough in a single wager to generate one.

2. Should I simply zero out the amount of the 1099K with a negative income amount with a note that states "gambling wins/losses reported elsewhere"?  And then add winnings and losses as the values from my spreadsheet?

3. Do I need to request a full transcript win/loss statement from the casino sites?

Thanks!

[ThomasM125]

You should keep as much documentation as possible to support the gambling winnings and losses you report on your tax return, in case of an audit. So, you should get a transcript from the casinos if possible. The spreadsheet by itself may not be sufficient as you need documentary evidence of the amounts you enter on it.

As mentioned by @Cynthiad66 , you can only enter your losses as itemized deductions. So, you shouldn't enter them as a direct adjustment to income. 

[spiff1972]

Hello again,

I just tried to file my taxes, and it is getting rejected because I entered a negative amount in Line 7 of the Wages, Salaries, and Tips worksheet (1040).  I followed some other instructions (based on other posts in these forums) on how to handle the 1099k form which suggests entering a negative value that "cancels out" the amount reported on the 1099k from Paypal, and I reported the totals from my spreadsheet record of gambling wins/losses via the appropriate entries in the forms.  I used a description for the negative "other income" stating:

"Duplicate Income Reported by 1099K - documented in gambling winnings/losses instead"

How can i fix this?  Do i have to mail instead?  I already paid for the michigan e-file fee, since this didn't get flagged until I pressed the button to transmit the returns!

[AmyC]

Move the income deduction to other reportable income.  Follow these steps:

1. go to the federal income section
2. scroll to the bottom
3. Select Miscellaneous  Income, 1099-A, 1099-C, Start
4. Scroll to the bottom
5. Select Other reportable income, Start
6. Other taxable income?
7. Select YES
8. Description -something like -1099-K duplicate
9. Amount, enter your amount as a negative
10. continue

[spiff1972]

I'm 95% sure that is where I reported the negative amount before, but it was being flagged as invalid when I went to transmit the forms.  "Negative number not allowed".

I took a different approach, and deleted that negative amount.  

Instead, I went back to the 1099k, and checked the box that said "this amount is too large".  (I don't recall the exact verbiage, but I was then able to enter a value for the amount by which it was too large--the entire amount.)

Hopefully this is legit - technically it WAS too large, and I captured it more accurately by entering the gambling winnings/losses in the interview section...

After I made the above changes, my federal and state taxes didn't change.  When I initially removed the negative value for other income, the federal tax went WAY up, but after adjusting the 1099k form, it went back down.