Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.
Wednesday, May 14, 2014
STILL MORE CLIENTS SCREWED BY THE TAX CODE
I ain’t done yet.The list of
taxpayers screwed by our current Tax Code is not a short one.Today I add taxpayers with gambling winnings.
While this did form of screwing did not happen to any of my clients this
past tax filing season, it certainly has in the past.
Included in my client list are regular lottery players and senior
citizens who frequent the casinos of Atlantic City.Over the years I have seen many examples
where a taxpayer with net gambling losses for the year is royally screwed by Uncle
· As I recently explained (in my first example of clients being screwed
by the Tax Code), because of the way Social Security and Railroad Retirement
benefits are taxed there often exists a situation where you could be taxed on
$1.85 for every additional $1.00 of income. If you have $3,000.00 in gambling
winnings and $4,000.00 in gambling losses you could end up increasing your AGI
by $5,550.00 ($3,000.00 x 185%). Even if you can take full advantage of an
itemized deduction of $3,000.00 in losses, you still could end up paying
$383.00 in federal income tax in the 15% bracket, or $638.00 in the 25%
bracket, on a net loss for the year of $1,000.00.
· Even if you can deduct enough losses to wipe out your gambling income,
an increased AGI could reduce your allowable medical and miscellaneous job and
investment related deductions, reduce or even wipe out a multitude of
deductions and credits that are affected by AGI, and even cause you to fall
victim to the dreaded Alternative Minimum Tax (see Monday’s post).
· You can only receive the full tax benefit from deducting gambling
losses if the total of your other Itemized Deductions equals or exceeds the
allowable Standard Deduction. The Standard Deduction for a Single filer for
2013 was $6,100.What if a single
taxpayer with $5,000.00 in winnings and $6,000.00 in losses had only $3,000.00
in other deductions (i.e. state and local taxes and charitable contributions).
While he/she can deduct $5,000.00 in gambling losses, he/she only gets a tax
benefit for $1,900.00 of the losses: $5,000.00 losses + $3,000.00 other
deductions = $8,000.00 Schedule A - $6,100.00 Standard Deduction = $1,900.00
tax benefit. If he/she is in the 15% bracket he still ends up paying $465 in
federal income tax on $1,000.00 of losses, or $775 if in the 25% bracket.