TAX REFORM PROPOSALS – GAMBLING WINNINGS AND LOSSES

 

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?

TTFN

NOBODY EVER SAID TAXES WERE FAIR

Tax reform discussions rarely touch on the many inequities and basic “unfairness” in the US Tax Code.

Here are three examples of “unfairness” that still remain in the US Tax Code.  They were not addressed in the GOP Tax Act but should be in future tax reform legislation.  I have posted separately about these in the past – but here they are together in one post.

As an aside, many of the inequities in the pre-TCJA code involved or were made worse by the dreaded Alternative Minimum Tax.  But the Act makes the AMT no longer an issue in most cases.

(1) Taxation of Social Security and Railroad Retirement Benefits

As I am often telling clients each filing season, because of the way Social Security and Railroad Retirement benefits are taxed it is very possible that for every additional $1.00 of income you pay tax on $1.85.  So, income that falls within the new 22% bracket can be effectively taxed at 40.7% - almost 4% above the current top tax rate.

Social Security and Railroad Retirement benefits are taxed based on the extent of your other taxable income and tax-exempt interest.  You could pay tax on up to 50% or 85% of the gross benefits.  So, an additional $100 of dividends, or interest or capital gains or W-2 income can cause an additional $85 of your benefits to be taxed, so the $100 increase causes your AGI to increase by $185.

Because taxable Social Security and Railroad Retirement benefits increase AGI, increases could also reduce tax deductions and credits that are affected by AGI – increasing the effective tax rate of the increase.

As a side bit of unfairness, because increased SS or RR benefits increase AGI, the increase can potentially result in some qualified dividends and long-term capital gains, which have caused the increase in taxable SS or RR, being effectively taxed at more than the “advertised” 0% or 15% rate.

The Solution – tax Social Security benefits the same as any other pension with “after-tax” employee contributions, using the “Simplified Method”.  The taxable portion of the benefit would be calculated by SSA and reported as such on the SSA-1099 and RRB-1099, similar to the way partially taxable pension income is reported on the Form 1099-R.  Or perhaps treat Social Security and Railroad Retirement like a “ROTH” investment, as employee contributions are not deductible, and do not tax benefits at all.  These benefits were not taxed at all until 1984.

(2) Taxation of Gambling Winnings

Gross gambling winnings, reported on Form W-2G, are generally reported in full as income on Line 21 of Page 1 of the Form 1040, increasing AGI, while gambling losses, to the extent of reported winnings, are deductible as an Itemized Deduction.  So, it is possible for a taxpayer to pay additional federal income tax on net gambling losses.

John Q Taxpayer buys $10 in state lottery tickets each and every week.  One week he hits for $500.  He has no other gambling activity for the year.  He must report the $500 win in full as taxable income and, if he receives Social Security, potentially increase taxable SS benefits by $425.  So, his AGI could increase by $945.  If he is unable to itemize due to the increased Standard Deduction he does not get a tax benefit for his losses.  So, if he is in the 22% bracket he would pay from $110 up to $204 in federal income tax on $20 in gambling losses.

If the $500 win does cause his taxable SS benefits to increase by $425 but he can itemize and deduct $500 in losses on Schedule A he is still paying $94 in income tax in the 22% bracket.  And if he can deduct medical expenses the net taxable income is increased by $69 because the additional income reduces the allowable medical deduction.

Thankfully Tax Court decisions and IRS regulation revisions have corrected this problem for some casino gambling – but not for all gambling situations.

I have no problem with limiting the deduction for gambling losses to gambling winnings – just with where and how the losses are deducted.

The Solution – obviously, report only net gambling winnings, after deducting losses, but not less than 0, as income on Page 1 of Form 1040, as is done on the NJ-1040.

(3) The Marriage Tax Penalty

The Marriage Penalty manifests itself in many ways in the US Tax Code.  The result is that two married individuals, each with their own separate sources of income (i.e. W-2 or pension income), pay more income tax by filing as a married couple then by filing two separate returns as unmarried Single taxpayers merely living together.

Filing as Married Filing Separately does not always remove or reduce the Marriage Penalty.  Some deductions are “per return” and not “per spouse”.  And many tax benefits allowed on a Single return are reduced or just plain not allowed on a Married Filing Separate return – such as the Credit for Child and Dependent Care Expenses, the Earned Income Credit, the Credit for the Elderly or Disabled, or the HOPE or Lifetime Learning Education Credit.  A couple filing separately can pay more tax than if they filed a joint return.

The maximum amount of combined income or sales and property taxes that can be deducted on Schedule A is $10,000 – but only $5,000 if Married Filing Separate.  Two unmarried individuals living together can each deduct $10,000, for a total of $20,000.  If the 22% bracket applies, the marriage tax penalty for this item alone is up to $2,200. 

A married couple can deduct up to $3,000 in net capital losses per year – but only $1,500 if Married Filing Separate.  Two unmarried individuals each with capital losses for the year, or carried forward, in excess of $3,000 can each deduct $3,000, for a total of $6,000.  You do the math.

There is also a Marriage Tax Benefit – for households with only one earning spouse.  Because of the doubling of many tax benefits on a joint return the couple pays less tax than the earning spouse would pay on a Single return (if one spouse has no taxable income and was not married there is no need to file a return and the Standard Deduction is not claimed if filing as single – but twice the Standard Deduction is allowed on a joint return reporting the same total income; granted the earning taxpayer could claim the non-earning taxpayer as a dependent on the one Single return and possibly get additional tax benefits – but not as much as Married Filing Joint).

In my opinion there should be neither a tax penalty or tax benefit for marriage.

The solution – allow a two-income married couple to file separately as if they were each filing a Single return, with all the benefits and the same tax table and rate schedule as a Single filer.  I deal with this in more detail in “The Tax Code Must Be Destroyed”.  This at least does away with the marriage penalty.  I am not quite sure how to remove the marriage benefit, or if it actually should be removed.

There are many other inequities in the current US Tax Code.  I will discuss more in future posts.

Do you have any examples to share.

TTFN

TAXES AIN'T FAIR!

Tax reform has become a hot political topic.  Reduce taxes on the middle class, or increase taxes on the “wealthy” simply because they can afford it.

 

I see a great need for substantive tax reform not to reduce, or for some taxpayers increase, the actual amount of taxes paid – but to simplify the Tax Code and make it more fair.

 

Nobody ever said taxes are fair.  There are many inequities in the US Tax Code, some purposeful and some unintended.

 

Among the biggest inequities concerns how the Code treats some aspects of “gross income” and expenses related to generating this income.  I speak specifically of the taxation of gambling winnings and legal settlements.

 

If you have gambling winnings you must report, in most cases (how to report some winnings is a topic for another post), the gross winnings as income on Page 1 of the Form 1040.  This is the amount that is reported on Form W-2G.  So gross winnings are included in Adjusted Gross Income (AGI).  But gambling losses, to the extent of winnings reported, are deducted as a Miscellaneous Deduction on Schedule A if you are able to itemize (although not subject to the 2% of AGI exclusion).

 

Similarly, the gross amount of legal settlements, except for settlements for physical injuries or sickness (any damages or settlement you receive to compensate you for your medical expenses, lost wages, and pain, suffering, and emotional distress is not included in income), is included as income on Page 1 of Form 1040.  The legal fees, often as much as 1/3 of the settlement, and other related are also deducted as a Miscellaneous Deduction on Schedule A if you are able to itemize (in this case the deduction is subject to the 2% of AGI exclusion).

 

A taxpayer can have $5,000 in gross winnings from gambling activities for the year, but $6,000 in gambling losses.  So, the taxpayer’s gambling activity for the year has resulted in a loss.  The taxpayer ended up with no money “in pocket’ from gambling. 

 

If the taxpayer is able to itemize without taking into effect the allowed gambling losses, the Schedule A deduction for $5,000 in gambling losses results in net taxable income of 0 – so, in effect but not necessarily in reality, he/she does not pay federal income tax on the winnings.  But if the taxpayer is not able to itemize, even with the gambling loss deduction, or if he/she is only able to itemize because of the gambling loss deduction (without the deduction his itemizable deductions do not exceed the applicable Standard Deduction), he/she will be paying federal income tax on up to $5,000 of income that was not actually received – in the 25% tax bracket $0 in net gambling income could cost the taxpayer at least $1,250.

 

Similarly, with a taxable legal settlement, the need to deduct legal fees as a miscellaneous itemized deduction subject to the 2% of AGI exclusion could result in federal income tax being paid on more than the actual “in pocket” amount.

 

Of course, a large portion of the inequity comes from the fact that various items of income are increased and deductions and credits are reduced or eliminated based on one’s AGI.  And the fact that most itemized miscellaneous deductions are not allowed in calculating the dreaded Alternative Minimum Tax (AMT).

 

While a taxpayer may be able to wipe out gambling winnings with fully deductible gambling losses, the fact that gross winnings are included in AGI could result in more of the taxpayer’s Social Security or Railroad Retirement benefits (the amount of benefits taxed is determined by a formula that is based on AGI) being taxed – many frequent gamblers in the casinos of Atlantic City for example are senior citizens – or could reduce or totally eliminate allowable tax deductions or credits.  So again, the taxpayer is in reality paying federal income tax on $0 in net income.

 

The same is possible with a taxable legal settlement – except for settlements for discrimination claims, the related legal fees allowed as an “adjustment to income” which reduces AGI.  And, while there may be no excess tax under “regular” income tax rules there may be AMT.  Allowable gambling losses from Schedule A are fully deductible in calculating the dreaded AMT – but because legal fees are a miscellaneous deduction subject to the 2% of AGI limitation they are not deductible in calculating AMT.  So, tax is paid on the full amount of the gross settlement at a flat 26% or 28%.  When adding the federal and state tax to the legal fees the taxpayer may end up with only 1/3 or less of the actual award “in pocket”.

 

And while in many cases net and not gross gambling winnings are taxed under AMT, the fact that gross winnings are included in AGI, and therefore Alternative Minimum Taxable Income (AMTI), could reduce the AMT exemption, resulting in AMT tax on gambling winnings even if the net is 0.  $5,000 in gross winnings can reduce the AMT exemption by $1,250 and result in an additional $325 or $350 in AMT.

 

The AMT issue would go away if tax legislation repeals this tax.  And changing the way Social Security and Railroad Retirement benefits are taxed and no longer allowing AMT to affect tax deductions and credits would also help to remove inequities.  But the best way to do away with the unfairness of the tax treatment of these two types of income would be allowing taxpayers to net gambling losses against gambling wins (still not allowing the deduction of more losses than wins) and net legal fees against gross settlements – either directly by entering the net amount on Page 1 or by allowing the deductions as an adjustment to income reducing AGI – would certainly fix the problem.

 

So, what do you think?

 

FYI – I will post on other inequities in the current Tax Code in future posts.

 

TTFN

 

 

 

 

 

 

A TAX POTPOURRI

(1) One of the reasons I am called the “Wandering” Tax Pro is because once the tax filing season ends I enjoy travel via all methods – car, bus, plane, ship and train (not necessarily in that order). 

 

Over the past 30+ years my annual travel itinerary has often included several totally tax-deductible domestic vacations to attend tax-related conferences, conventions, and other CPE offerings.

 

You can deduct expenses that are “ordinary and necessary” for your business. An “ordinary” expense is one that is common and accepted in your specific trade or profession and a “necessary” expense is one that is helpful and appropriate. 

 

One “ordinary and necessary” business expense for which you can claim a tax deduction is the cost of education that is (1) expressly required by an employer, by law, or by government regulation, or (2) maintains or improves skills required in your current trade or business. If a conference or convention falls under this category the associated registration and travel expenses are deductible.

 

I have written a special report - POSITIVELY TAXES: A TAX DEDUCTIBLE VACATION - that explains in detail how to make your next vacation tax deductible by attending a job or business related conference or convention, and includes worksheets to help you keep track of your deductible expenses.

 

(2) It has always been important for frequent gamblers to keep detailed “contemporaneous” records of gambling activity to minimize the tax cost of winnings, but recent developments have made this even more vital. 

 

Gross gambling winnings must be reported as “other income” on Line 21 of your Form 1040.  Gambling losses, to the extent of reported winnings, are allowed as a “Miscellaneous” Itemized Deduction.  If you report gambling winnings of $10,000 on Line 21 of your Form 1040 the most you can deduct as gambling losses on Schedule A is $10,000.  Allowable gambling losses are deducted in full, and are not subject to the 2% of AGI exclusion.     

 

Losses from any type of wagering transaction can be deducted against your reported gross gambling winnings. If you win in the slots your deduction is not limited to losses from slot machines. You can deduct losses from the lottery, 50-50s, bingo, table games such as poker and blackjack, charity raffles, horse racing, keno, etc., up to the amount of your total winnings.

 

I have also written a special report – POSITIVELY TAXES: MINIMIZING REPORTED GAMBLING WINNINGS - that explains the basics of how gambling activity is taxed describes in detail how recent Tax Court case decisions allow you to reduce the amount of gambling winnings you must report, and reduce the tax cost of your gambling activity to a minimum, via proper documentation of your casino visit wins and losses.  It also contains valuable worksheets.

 

(3) For years now I have been telling clients and readers that it is your “Adjusted Gross Income”, or AGI, and not your net taxable income that is the most important number on your tax return.

 

Why is AGI so important?  Many tax deductions and credits are reduced, phased-out, or altogether eliminated based on your AGI, or in some cases a “Modified” AGI, and several items of income are increased, and some deductible losses are reduced, as this number grows.

 

There are “above the line” deductions and “below the line” deductions.  Above the line deductions reduce your Adjusted Gross Income and your Net Taxable Income.  Below the line deductions, which include the Standard Deduction, Personal Exemptions, and itemized deductions, reduce Taxable Income, but not Adjusted Gross Income.

 

A below the line deduction of $1,000 will reduce your tax liability by the amount of your marginal tax rate.  For a taxpayer in the 25% a below the line deduction of $1,000 will reduce the tax liability by $250.  But an above the line deduction of $1,000 can reduce the tax liability by substantially more than $250.  It is actually possible for a reduction of only $5 in AGI to reduce your tax liability by $500 or more!

 

Guess what?  I have written a special report – POSITIVELY TAXES: REDUCING ADJUSTED GROSS INCOME – that discusses how to reduce your 2016 AGI during the year and when preparing your Form 1040 and minimize your tax liability.  In it I explain how a reduction of $5 in AGI can reduce your tax liability by $500 or more.

 

The above referenced special reports are the first 3 items in MY NEW DOLLAR STORE (a work in process) -  and are available to you, as you might expect, for only $1.00 each sent as a pdf email attachment, or $2.00 each for a print edition sent via postal mail.

 

If you enjoy reading THE WANDERING TAX PRO and have found it helpful to you over the years one way you can say “thank you” is by purchasing one of the above POSITIVELY TAXES reports.

 

To order send your check or money order, payable to TAXES AND ACCOUNTING, INC, for $1.00 or $2.00 for each report you want and your email or postal address to –

 

MY NEW DOLLAR STORE

TAXES AND ACCOUNTING, INC

POST OFFICE BOX A

HAWLEY PA 18428

 

BTW – I also have more extensive and detailed TAX DEDUCTION GUIDES available for $2.00 or $4.00 each.  Click here for more information.

 

TTFN

 

 

 

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 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”.

TTFN

THE BIGGEST LOSER

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?

Wrong!

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.

TTFN

KEEPING TRACK OF GAMBLING ACTIVITY

Do your vacation plans this summer include a trip to the casinos in Las Vegas, Reno, Atlantic City, New Orleans, St Louis, Bethlehem or Mt Airy PA, etc, etc, etc, (Gott in Himmel – they are everywhere!) to play the slots?

If the answer is yes be sure to keep proper track of your gambling activity for tax purposes, just in case you come home a winner.

The first thing you should do is join the casino’s “Players Club” and get a membership card, which you can use to track your slot activity at that casino.

You will receive a Form W-2G for each individual slot machine win of $1,200 or more. But you do not have to report as gross income on your Form 1040 the total on all the Form W-2Gs you receive for the year, as had been done in the past.

The Tax Court, in TC Memo 2009-226 (Ann L Laplante v Commissioner of Internal Revenue) has agreed that a gambler’s aggregate (i.e. “net”) winnings for the day per casino are includible in income rather than individual winnings on a slot machine.

Gambling winnings are included in Adjusted Gross Income, which can affect a multitude of other tax deductions and credits and can increase the portion of your taxable Social Security or Railroad Retirement benefits. Gambling losses, to the extent of winnings, are deducted as Miscellaneous Expenses on Schedule A, but are not subject to the 2% of AGI exclusion. The smaller the amount you report as winnings on Page 1 of the 1040 the better.

According to the Tax Court decision referenced above –

“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. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).”

The Court decision also states-

“No valid reason exists for taxpayers engaged in wagering transactions not to maintain a contemporaneous gambling diary or gambling log”.

Just as a person who uses his/her car for business must keep a contemporaneous record of business mileage, a gambler must keep a contemporaneous record of daily activity. A simple pocket notebook will do. You would indicate the date, the name of the casinos visited, and the net activity from each casino for the day.

When you enter a casino have your money in two separate pockets – one pocket for your gambling activity and the other pocket for your other purchases (food, beverage, souvenirs, etc). Keep the money separate for the entire day.

Let’s say you spend this week-end in Atlantic City. On the morning of July 16th you began your gambling at Bally’s Wild West on the Boardwalk. Make the following entry in your notebook –

7/16/2011 – Atlantic City NJ

(1) Bally’s Wild West

Beginning Cash = $200.00
Ending Cash = $315.00
Net Win/(Loss) = $115.00

You may have won $1,300.00 in one slot pull while at Bally’s on July 16th, but you put $1,185.00 back into the machines before leaving the casino. So instead of $1,300.00, as appears on the Form W-2G you got from Bally’s, you would report only $115.00 as actual gambling winnings on your 1040.

On the same day you also gamble at Ceasar’s. You would make the following entry -

(2) Ceasar’s Palace

Beginning Cash = $315.00
Ending Cash = $290.00
Net Win/(Loss) = ($25.00)

Net Daily Activity

Wins = $115.00
Losses = $25.00
The next day you return to Bally’s -

7/17/2011 – Atlantic City

Bally’s Wild West

Beginning Cash = $290.00
Ending Cash = $240.00
Net Win/(Loss) – ($50.00)

Net Daily Activity

Wins = 0
Losses = $50.00

You did not win enough in one pull to receive any additional Form W-2Gs at Ceasar’s or the next day at Bally’s. The $75.00 in net losses would be deducted as a gambling loss on Schedule A.

By reporting $115.00 as gambling winnings on Page 1 of your Form 1040 instead of $1,300 you reduce your AGI by $1,185.00. While your net taxable income would be the same whether you reported $115 or $1,300 on Page 1 and were able to deduct all of your losses on Schedule A – your actual tax liability may very well be less by claiming the lower amount of winnings. And if you are not able to itemize and claim losses you will certainly pay less federal income tax by claiming only $115.00 as your winnings.

You would make similar entries each time you visit a casino during the year.

Not being a gambler I do not know how detailed is the information you get from using your Player’s Club cards. It is possible that print-outs would support the individual activity by date that you have entered in your book. Do not, however, assume the print-out of card activity is enough proof – you should still maintain your own contemporaneous gambling log.

So, Russ, did I get it right?

TTFN

ANOTHER GAMBLING WIN

Not too long ago I posted about a Tax Court case involving gambling winnings and losses (see my post “A LITTLE THIS-A AND A LITTLE THAT-A – WITH THE EMPHASIS ON THE LATTA”). The NATP year-end tax update seminar I attended in Atlantic City recently brought my attention to an IRS Chief Counsel Advice on the issue with a similar conclusion.

Chief Counsel Advice EMISC 2008-011, issued December 5, 2008, as did the Tax Court discussed in my post, addressed the question - “How does a casual gambler determine wagering gains and losses from slot machine play”.

Here are the facts in the situation that prompted the CCA –

Taxpayer, a retired woman with a fixed income, limits her slot machine play to $100 per visit to the casino. During the year in question she went to the casino on 10 separate occasions. On 5 she lost the entire $100. On 5 she cashed out (left the casino) with $20, $70, $150, $200, and $300. When she cashed out with $20 and $70 she actually had net losses of $80 and $30, after deducting her $100 initial “investment”. On the other 3 visits she had net gains of $50, $100, and $200.

According to the CCA, the taxpayer had reportable gambling winnings of $350 for the year, the total of the $50, $100 and $200 net gains. The amount she would report as taxable income on Line 21 of her Form 1040 is $350, regardless of the amount of winnings that had been reported on any W-2G forms. She would also be able to deduct $350 in gambling losses if she itemized on Schedule A.

It is very possible that she could have won $1000 in a single “pull” during one of her visits, but continued to play. In such a case she would have received a Form W-2G from the casino for $1,000. But she would still report only $350 in “gross” taxable winnings.

The Chief Counsel Advice, like the Tax Court decision, stated that a taxpayer only recognizes a wagering gain or loss at the time he or she cashes out.

The Tax Court decision has stated -

"[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."

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It is "more better" to report a smaller amount of "gross" gambling winnings on Line 21 of the Form 1040 - even if all of the losses will be wiped out by a Schedule A deduction so that the net taxable affect = "0". The amount of gross winnings reported on Line 21 will increase one's Adjusted Gross Income (AGI) and can therefore reduce a multitude of tax benefits that are phased-out or totally eliminated based on AGI.
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In describing the situation that prompted the CCA, the NATP indicated that the taxpayer in question, “properly substantiates all gains and losses incurred in her wagering transactions according to (IRC Section) 6001 and Revenue Procedure 77-29”. NATP goes on to say, “That means keeping an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, which is kept with the tax return records until the close of the statute of limitations on a tax return”.

It is extremely important that a “casual” gambler (or a “professional” one for that matter) keep a detailed diary of the net gambling activity from each visit to a casino or racetrack or whatever. If you play the slots at a casino you should join that casino’s “rewards” club and use the club card to document your activity as an additional back up. This should not take the place of an actual diary.

I do not know if the print-out provided by using the club card will indicate net activity for each visit. Do any of you regular gamblers out there know if it does?

As I suggest in my earlier post –

“Just as a person who uses his/her car for business must keep a contemporaneous record of business mileage, a gambler must keep a contemporaneous record of daily activity. A simple pocket notebook will do. You would indicate the date, the name of the casino, and the net activity from that casino for the day. For example:

November 19, 2009 – Bally’s Wild West - $115.00; Ceasar’s Palace – ($25.00)

November 20, 2009 – Bally’s Wild West – ($50.00)

You may have won $1,000 in one slot pull while at Bally’s on November 19th, but you put $885.00 back into the machines before leaving the casino. So instead of reporting $1,000 you would report only $115.00. The additional $75.00 in losses could be deducted as a Miscellaneous itemized deduction not subject to the 2% of AGI exclusion.”

When giving your tax professional Form W-2Gs you have received for the year also be sure to give him your gambling diary. He will need to attach to your Form 1040 a statement to reconcile the amounts reported on the W-2G forms to the amount reported on Line 21. If such a statement of reconciliation is not included with the return you will no doubt get a CP 2000 notice and bill from the IRS.

TTFN

A LITTLE THIS-A AND A LITTLE THAT-A – WITH THE EMPHASIS ON THE LATTA

* A recent taxpayer-friendly Chief Counsel Advice memo (CCA 200940030) tells us that the IRS Chief Counsel has determined that in the case of a taxpayer’s mortgage loan of more than $1,000,000, which was used to buy a personal residence, interest on $1,100,000 was deductible; the deduction was not limited to interest on the $1 Million “acquisition debt” maximum. The additional $100,000 of borrowings qualified as equity indebtedness. This is contrary to the decisions of court cases from 1997 and 2000.

* Great news for my clients who frequent Atlantic City. I mentioned this item briefly in a previous BUZZ posting, but it bears repeating and expanding. The Tax Court, in TC Memo 2009-226 (Ann L Laplante v Commissioner of Internal Revenue) has agreed that a gambler’s aggregate winnings for the day per casino are includible in income rather than individual winnings on a slot machine.

This is very important because “gross” gambling winnings are reported in full on Page 1 of the 1040, but losses are deductible, to the extent of winnings, only if you itemize. Gross winnings increase your AGI, and can reduce a multitude of tax benefits, increase taxable Social Security or Railroad Retirement, and make you victim of the dreaded AMT.

Russ Fox of TAXABLE TALK discusses this case in detail in “An Interesting Gambling Case”.

As Russ points out, Ms Laplante’s savvy tax professional, who happened to be an attorney, “realized that much of her winnings were illusory; that her true winnings were not the total of her W-2Gs but she walked out of the casino with—the net win or loss for the trip. The attorney felt that $4,000 was the correct number to report on the return” instead of the $56,200 she received in W-2Gs. So she entered $4,000 on Line 21 of her Form 1040 instead of $56,200.

The Court actually agreed with the tax pro’s reasoning. Russ quotes from the Court’s decision –

“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. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).”

However Russ does state the following caveat – “I do need to point out that the Tax Court did not pass judgment on this issue, so it is possible they would disagree at some future date”.

What is important for gamblers who wish to use this method to report gambling winnings to remember is the following quote from the decision –

“No valid reason exists for taxpayers engaged in wagering transactions not to maintain a contemporaneous gambling diary or gambling log”.

Just as a person who uses his/her car for business must keep a contemporaneous record of business mileage, a gambler must keep a contemporaneous record of daily activity. A simple pocket notebook will do. You would indicate the date, the name of the casino, and the net activity from that casino for the day. For example:

November 19, 2009 – Bally’s Wild West - $115.00
– Ceasar’s Palace – ($25.00)

November 20, 2009 – Bally’s Wild West – ($50.00)

You may have won $1,000 in one slot pull while at Bally’s on November 19th, but you put $885.00 back into the machines before leaving the casino. So instead of reporting $1,000 you would report only $115.00. The additional $75.00 in losses could be deducted as a Miscellaneous itemized deduction not subject to the 2% of AGI exclusion.

It is also a good idea to join the various “clubs” of the casino’s you frequent so that you can get a membership card to use to track daily gains and losses as additional documentation. But using the card should be in addition to and not instead of keeping a daily gambling diary.

* Did you know that beginning with 2009 tax returns filed in 2010, you will be able to check a box on your return to use all or part of any refund to purchase Series I U.S. savings bond, available in denominations of $50, $100, $200, $500, and $1,000, which will be mailed directly to you? You do now!

* This is not a tax item – but it is certainly worth discussing –

By pure luck I happened upon a great item on this past Sunday’s CBS Sunday Morning program. It discussed the issues brought up in the book “Life Without Lawyers: Liberating Americans from Too Much Law” by lawyer Philip K. Howard.

Here is a quote from the book, taken from a review from the New York Times –

“‘Sometimes I wonder how it came to this,’ a teacher in Wyoming told me, ‘where teachers no longer have authority to run the classroom and parents are afraid to go on field trips for fear of being sued’.. Thomas Jefferson might have the same question. How did the land of freedom become a legal minefield? Americans tiptoe through law all day long, avoiding any acts that might offend someone or erupt into a legal claim. Legal fears constantly divert us from doing what we think is right.”

The press release for the book further identifies the absurdities of current life brought about by lawyers –

“Americans are losing the freedom to make sense of daily choices – teachers can’t maintain order in the classroom, managers are trained to avoid candor, schools ban the game of tag, and companies plaster inane warnings on everything: ‘Remove Baby Before Folding Stroller’”

With apologies to Kelly Erb, Jim Maule, Paul Caron, Tom Cooke and Jim Grisi, I have always felt that the average ambulance-chasing lawyer (not tax or labor lawyers) was the scum of the earth, and that 500 lawyers on the bottom of the ocean was a good start.

I obviously agree that there are certainly times when you do need a lawyer, and that there have been lawyers who have done much good, it is my firm belief that in the grand scheme of things, similar to my opinion on organized religion, lawyers have historically done more bad than good.

The book’s press release is absolutely correct when it says –

“Today we are flooded with rules and legal threats that prevent us from taking responsibility and using our common sense.”

Of course lawyers are not totally to blame. They started the mess by filing ridiculous lawsuits and are exploiting the situation – but it is the juries that have perpetuated the folly. Remember the jury that awarded the cafone who spilt hot coffee from a fast food chain on her (?) lap millions of dollars. What complete idiots!

I have been on a jury panel twice over the years. One occasion involved a civil suit. An elderly women, as I recall at least in her 70s, was suing a non-profit hospital because she fell in the hall when visiting a patient. It seems something had spilled the floor and was not immediately cleaned up, although all normal procedures for hospital maintenance were properly in place. The bottom line of the plaintiff’s case, if memory serves me, was that as a result of the accident the woman’s legs hurt when she was on her knees scrubbing the floor at home.

Luckily, for the plaintiff that is, I was chosen as the “alternate juror” and was not involved in the final deliberations and decision. My fellow jurors ended up awarding the woman $75,000 in damages for her “pain and suffering”.

Gott In Himmel! I would expect that the legs of any 70-80 year old would hurt after scrubbing the floor on their knees.

I plan on ordering Howard’s book. I suggest you do so as well.

* Just a reminder - if you traded in a junk vehicle under the Cash for Clunkers program you do not have to pay tax on the credit you received. As a tax preparer I do not even need to know about it, unless you used your old or new car for business. And even in such a situation you won’t pay tax on the credit.

* Before I close I want to pass along an email I got from a new website – www.TaxQueries.com.

“The basic idea behind the site is that you ask questions and then receive answers from other tax professionals who might know. It's entirely peer driven. There is no single "authority" who has all of the answers. Everyone pools their knowledge into answering questions. We feel that the design we've put together and the way we've organized the information (in many cases) can much more straightforward than browsing forums or wading through database sites to get an answer.”

I have not had a chance to check it out – but I will once I “come up for air”.

TTFN

IT AIN'T NECESSARILY SO

I just purchased 6 raffle tickets for the annual Theatre Development Fund raffle. I participate every year. TDF offers some great prizes, including the Grand PriZe of a pair of tickets to five Broadway shows during the “season” (it used to be every show opening during the season).

TDF is a qualified charitable organization to which contributions are tax deductible.

However the cost of my 6 raffle tickets is not deductible as a charitable contribution on Schedule A – even if I do have a hard copy receipt from TDF for my payment as well as documentation via a credit card statement.

By purchasing a raffle ticket from TDF, or any church or charity, I am not making a voluntary charitable contribution to the organization. I am gambling. I am purchasing the chance to win one of the 50 prizes offered by TDF. It is exactly the same as purchasing a NJ Lottery. By purchasing a lottery ticket I am certainly not making a contribution to the Treasury of the State of New Jersey (the last place that I would voluntarily contribute money is the Treasury of the State of New Jersey – NJ politicians are fat enough on graft and pork as it is!).

Many of the lists of charitable contributions, or receipts for charitable contributions, that clients provide me with each tax season include the cost of raffle or 50-50 tickets for their church or a charity. If they itemize I do not include these amounts in the deduction claimed for charitable contributions on Schedule A.

The cost of a raffle ticket may be deductible as a gambling loss if you are also reporting gross gambling winnings on Page 1 of your 1040. Gambling losses, only to the extent of gambling winnings, are deductible on Schedule A as a “miscellaneous” deduction - not subject to the 2% of AGI exclusion.

So if I win $1500 in the slots at Atlantic City I can deduct the $25 I paid for my 6 TDF raffle tickets as a gambling loss on Schedule A. But, to repeat, I cannot deduct the $25 as a charitable contribution.

In addition to purchasing raffle tickets I also make a contribution to TDF as part of their annual fund-raising campaign. I pay by check or via credit card charge. This payment is deductible.

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Speaking of both Broadway and gambling - the TONY Award nominations have been announced. HAIR has received 8 nominations including Best Revival of a Musical.

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I have tickets for HAIR for the Saturday evening before the TONY presentations. Each year I attend a Broadway show with friends on the Saturday night before the TONY show - and each year for the past few years the show I have seen on Saturday night, or a performer from the show (or both), has won a prominent TONY Award on Sunday night - for example GYPSY, PAJAMA GAME, CURTAINS to name the most recent winners.

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Anyone out there willing to take my bet that HAIR will win as Best Revival of a Musical?

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TTFN

1040 FYI: DEDUCTING GAMBLING LOSSES

Jimmie Clemons, retired, had received a 1099 reporting $44,800 in winnings from a casino. As his gambling losses for the year exceeded $44,800, he did not report any winnings or losses on his Form 1040.

The court, in Jimmie L Clemons, T.C. Summary Opinion 2005-109, upheld the IRS position that gross gambling winnings must be reported as income on Page 1 of the tax return, with losses, to the extent of winnings, allowed as an itemized deduction, which is not subject to the 2% of AGI exclusion.

While Jimmie was able to deduct $44,800 in losses to wipe out his $44,800.00 of income, the fact that the $44,800 in winnings was included in his Adjusted Gross Income caused 85% of his Social Security benefits to be taxed!

I have seen many examples where a client with net gambling losses for the year is royally screwed by "Sam" -

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* Just like in the case of Jimmie Clemons, because of the way Social Security and Railroad Retirement benefits are taxed, there often exists a situation where an individual is taxed on $1.85 for every additional $1.00 in income. A taxpayer in such a situation who has $3,000 in gambling winnings reported on a Form 1099, and $4,000 in substantiated gambling losses, ends us increasing his AGI by $5,500 ($3000 x 185%). Even if he can take full advantage of an itemized deduction of $3,000 in losses, he still ends up paying $383 in federal income taxes in the 15% bracket, or $638 in the 25% bracket - all on net losses for the year of $1,000!

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* Even if a taxpayer can deduct enough losses to wipe out his gambling income, the increase in AGI caused by reporting gross winnings on Page 1 of the Form 1040 can reduce or even wipe out a multitude of deductions and credits that are affected by AGI, and could even cause one to fall victim to the dreaded Alternative Minimum Tax (AMT).

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* One can only receive the full tax benefit of deducting gambling losses if the total of his other “itemizable” deductions equals or exceeds the allowable standard deduction. What if a single taxpayer with $5,000 in winnings and $6,000 in losses in 2008 only has $2,000 in other itemized deductions (i.e. state and local income taxes and charitable contributions). While he can deduct $5,000 in gambling losses, he only gets a tax benefit on $1,550 of the losses ($5,000 losses + $2,000 other deductions = $7,000 Schedule A - $5,450 standard deduction = $1,550). If he is in the 25% bracket, he ends up paying $863 in federal income tax on $1,000 of losses!

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* While New Jersey allows one to "net" gambling winnings and losses on the state income tax return (a person with $5,000 in winnings and $6,000 in losses would have "0" taxable income), most states follow the federal return, which will increase the total tax cost of gambling losses. FYI, since NJ state lottery winnings are exempt from NJ state income tax, NJ state lottery losses cannot be deducted against other gambling winnings in calculating the net amount taxed by NJ. If, in the above example, $2,000 of the $6,000 in losses represents NJ state lottery tickets, the taxpayer must report a net of $1,000 in gambling winnings on his NJ-1040.

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I should point out that losses from any type of wagering transaction can be deducted against your gambling winnings. If you win in the slots your deduction is not limited to losses from slot machines. You can deduct losses from the lottery, 50-50s, bingo, table games such as poker and blackjack, charity raffles, horse racing, keno, etc., up to the amount of your winnings. It is a good idea to keep your losing lottery, raffle and racetrack tickets for the year, and keep track of slot activity by using a player’s card, in case you make a big score. If you are unlucky enough to be chosen for an audit of your losses here is a word of advice – make sure your losing racetrack tickets do not have footprints on them.

You should also know that winnings from a “no purchase necessary” marketing sweepstakes or contest are not considered to be gambling winnings for the purpose of calculating deductible gambling losses. The IRS defines gambling winnings as winnings from a “wagering transaction”. A recent IRS “Technical Advice Memorandum” (TAM 200417004 ) states that such winnings are not gains from a “wagering transaction” because the winner did not furnish “consideration” for the chance to win the prize. If you win the Publishers’ Clearing House sweepstakes, or a trip to Club Med by being the 10th caller to a radio station, you must report the winnings, or the market value of the trip, as income on your Form 1040, but you cannot deduct any losing lottery tickets, slot machine losses, or any other kind of gambling losses against this income.

So who said the Tax Code had to be fair?

TTFN