Wednesday, July 24, 2013


Dana Anspach talks about a gross unfairness in the tax treatment of gambling winnings and losses – one that I have been pointing out for years – in her post “Gambling Tax Hits SSA Payouts — Even When You Lose” at MARKETWATCH.

Gross gambling winnings are reported as income on Page 1 of the Form 1040.  Gambling losses, to the extent of winnings, are deducted as an itemized deduction on Schedule A.  So if you win $5,000 and you lose $6,000 your losses wipe out your winnings and there is no tax – right?


Dana correctly explains -

Although your gambling winnings are offset by losses, the way winnings are reported they inflate your MAGI {Modified Adjusted Gross Income – rdf} before they are offset by any losses. MAGI is different than taxable income, and MAGI is a major deciding factor in determining how much tax you pay in many other areas.” 

Dana goes on –

For example, your MAGI will affect all the following:

• Your eligibility to make a Roth IRA contribution

• The amount of your Social Security benefits subject to taxation

• The amount of Medicare Part B & D premiums that you pay

• Phaseouts of exemptions and itemized deductions

• Applicability of the 3.8% Medicare surtax on investment income

• Your eligibility for a tax credit/subsidy for the purpose of purchasing health insurance (starting in 2014)

What Dana does not say is that excessive gambling winnings could also cause a taxpayer to become victim of the dreaded Alternative Minimum Tax (AMT).

Her bottom line, correctly stated –

Gambling winnings, even if offset by the same amount of losses, can cause you to pay thousands more in taxes.”   

Dana’s example concerns someone with excessive winnings and losses – with truly costly consequences.  But what about the retiree who reports $5,000 in gambling winnings on Page 1 of the Form 1040 and has more than $5,000 in losses.

If this person does not own a home and pay real estate taxes he/she may not be able to receive a full tax benefit for losses because total “itemizeable” deductions, without the gambling losses, are less than the applicable standard deduction.  If filing a joint return, the gambling taxpayer may not be able to get a tax benefit for any losses!  And it is possible that the $5,000 in winnings could increase taxable Social Security benefits by as much as $4,250 and net taxable income by $9,250.

So a taxpayer who has actually lost money gambling for the year could end up paying federal income tax on $9,250 in truly nonexistent income!  For someone in the lower 15% bracket that comes to $1,388. 
Even if the taxpayer receives a full tax benefit for gambling losses on Schedule A - he/she has increased net taxable income by $4,250 - at a cost of $638. 

I wonder if Dana’s client, with $550,000 in winnings and $600,000 in losses, kept a gambling log during the year.  Doing so could have saved the client lots of money.

Under relatively recent court decisions a gambler’s aggregate (i.e. “net”) winnings for the day per casino should be included in gross income and not the individual winnings on a slot machine.  You will receive a separate Form 1099-G for each individual slot win in excess of $1,200 – but this is not necessarily the amount that you should report on Page 1 of your 1040.

According to the court –

Respondent nonetheless agrees with petitioner’s theory of recognizing slot machine play on the basis of net wins or losses per visit to the casino. Specifically, respondent states the following:

[T]he better view is that a casual gambler playing a slot machine, such as the petitioner, recognizes a wagering gain or loss at the time she redeems her tokens. The fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized.  

For details on the procedure for tracking true reportable gambling winnings see my article “Not Keeping Track Turns Gambling Winners Into Tax Losers” at MAINSTREET.COM.

I sincerely hope that the idiots in Congress consider this gross inequity when, hopefully, rewriting the Tax Code this fall.



Michael Cash said...

It is even worse in Wisconsin where you can't deduct your losses.

Michael Cash said...

It is even worse in Wisconsin where you can't deduct your losses. Roughly speaking if you start with $100 and bet on games with a 90% payout when you run out of money you will have generatee $900 of taxable income with nothing to offset it.

Carol said...

Wow! I didn't realize you could be paying an enormous amount in taxes for winning or losing! Thanks for bringing this to everyone's attention.