Monday, March 13, 2023



More “unfairness” in the US Tax Code.
Gross gambling winnings, reported on Form W-2G, are generally reported in full as income on Line 8b of Form 1040 (or 1040-SR) Schedule 1, increasing AGI, while gambling losses, to the extent of reported winnings, are only deductible as an Itemized Deduction.  So more often than not a taxpayer pays federal income tax on net gambling losses.
Recently retired John Q Taxpayer buys $10 in state lottery tickets each and every week and drops $100 in the slots at Atlantic City twice a year.  One week he hits for $660, and received a Form W-2G to report this win.  He has no other gambling activity for the year.  He must report the $660 win in full as taxable income and, because he receives Social Security, potentially increases his taxable SS benefits by up to $561.  He, like most Americans, is not able to itemize and therefore cannot deduct any of his losses.   So, his AGI could increase by $1,221.  And if he is in the 22% bracket, he could pay up to $270 in federal income tax on $60 in net gambling losses
The bigger the win, the greater the increase to his AGI and the greater the tax.  Even if he were able to itemize and deduct some of his losses, because he collects Social Security his taxable benefits could still increase, and his increased AGI could also reduce available deductions or benefits that are reduced based on AGI, adding to his tax cost.
Thankfully Tax Court decisions and IRS regulation revisions have corrected this problem for some casino gambling – but not for all gambling situations.  And complying with the regulations requires detailed contemporaneous documentation.  The situation described for John Q Taxpayer above is the most common tax treatment.
I have no problem with limiting the deduction for gambling losses to gambling winnings – my issue is with where and how the losses are deducted.
The Solution – obviously, report net gambling winnings, after deducting losses, but not less than 0, as income on Schedule 1, as is currently done, for example, on the NJ state income tax return (Form NJ-1040).
Do you agree?


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