Wednesday, May 14, 2014


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 Sam.

· 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.

One way to minimize any screwing from gambling winnings is to keep very good records.  See my MAINSTREET.COM item “Not Keeping Track Turns Gambling Winners Into Tax Losers”.


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