Gambling Losses New Tax Law
Tax deductions for gambling losses are the countable thing in the tax plan. Gambling losses are in reality tax-deductible, but it will apply only to the extent of the winnings. Winner requires reporting the total amount that wins as taxable income on winner return. If you incur losses from gambling activities during the year, you can deduct those losses up to the amount of your winnings. Although the Tax Cuts and Jobs Act (TCJA) suspends deductions for other.
From scratch-off lottery tickets to casino slot machines, the opportunities for your clients to lay down a wager are endless. According to the latest statistics, gambling revenue tops $158 billion each year and is expected to rise much higher with the legalization of sports betting.
While winning big may be a long shot, the odds are good that the IRS will expect its share. Here’s a rundown of the current tax law rules for gambling winners … and losers.
Winners
Gambling winnings — whether from a church bingo game or a mega-million lottery ticket — are fully taxable under federal tax law. Gambling income includes cash winnings and the fair market value of prizes, such as cash and tips.
Clearly, some gambling winnings may slip under the IRS’s radar — a $50 prize from a scratch off lottery ticket isn’t likely to be pursued by the IRS or even remembered by your client at tax time. However, more significant winnings are required to be reported to the IRS by the payer.
Under current rules, payers must report the following on Form W-2G, Certain Gambling Winnings:
- $1,200 or more in gambling winnings (not reduced by the wager) from bingo or slot machines.
- $1,500 or more in winnings (reduced by the wager) from Keno.
- More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament.
- $600 or more in gambling winnings (except winnings from bingo, keno, slot machines and poker tournaments) if the payout is at least 300 times the amount of the wager.
- Any other gambling winnings subject to federal income tax withholding.
In addition, gambling winnings from sweepstakes, wagering pools and lotteries are generally subject to regular income tax withholding of 24 percent if the winnings (minus the wager) are more than $5,000. In the case of winners from horse races, dog races, jai alai or certain other wagering transactions, withholding is required if the winnings are more than $5,000 and are at least 300 times the amount wagered. Withholding is not required for winnings from bingo, keno or slot machines, or for winnings of $5,000 or less. However, backup withholding may be required if the winner does not furnish a correct taxpayer identification number.
Losers
Under longstanding rules, casual gamblers can deduct gambling losses — but only to the extent of gambling winnings. What’s more, gambling losses are deductible only if a client itemizes deductions, and only if the client can substantiate the amount of the losses. In a recent case, the U.S. Tax Court denied a deduction for estimated losses claimed by husband and wife poker players because they didn’t provide evidence, such as a personal log of winnings and losses, to back up their claim. The couple explained that they tried to keep a daily record of their poker winnings and losses, but gave up the practice because it was “bad for your psyche” [Pham v. Comm., T.C. Summary Opinion 2016-73].
New law impact: For 2018 through 2025, the Tax Cuts and Jobs Act eliminates miscellaneous itemized deductions that were previously deductible subject to the 2-percent-of-adjusted-gross-income floor. However, that law change does not apply to gambling losses, which have been deductible – and will continue to be deductible – up to the amount of gambling income.
On the other hand, another new law change may impact loss deductions for casual gamblers. The new law significantly raises the standard deduction amounts for all filers, thus eliminating the advantage of itemizing for many taxpayers. In addition, many gamblers will not be able to offset their gambling losses against gambling winnings.
Gambling professionals
Professional gamblers report their winnings and deduct their losses above-the-line on Schedule C, Profit or Loss From Business. Thus, unlike casual gamblers, gambling pros can offset winnings with gambling losses even if they do not itemize deductions. Moreover, in a 2011 decision, the Tax Court held that the limitation of gambling loss deductions to gambling gains did not apply to non-wagering expenses of a gambling trade or business, such as travel expenses and admissions fees to a gambling venue. Consequently, those expenses could result in a net loss from gambling [Mayo v. Comm. 136 T.C. 81].
New law impact: The IRS acquiesced in the Tax Court decision, but Congress was apparently unhappy with the result. Effective for tax years beginning after 2017 and before 2026, tax reform provides that the gambling loss limitation applies not only to gambling wagers, but also to any deduction incurred in carrying on a wagering transaction [IRC §165(d)].
Nonetheless, the odds are that gambling pros will still have better luck than casual gamblers when it comes to tax write-offs. Despite the new law changes, losses up to the amount of gambling income remain deductible by professional gamblers, whether they itemize deductions or claim the increased standard deduction.
The tax law allows you to deduct the amount of your gambling losses within certain limits. But these deductions are often contested in the courts.Gambling Losses New Tax Law 2018
Salvage gambling loss deduction.
If you incur losses from gambling activities during the year, you can deduct those losses up to the amount of your winnings. Although the Tax Cuts and Jobs Act (TCJA) suspends deductions for other miscellaneous expenses from 2018 through 2025, the gambling loss deduction remains intact. Furthermore, miscellaneous expenses are deductible only to the extent that the annual total exceeds 2% of adjusted gross income (AGI). But the 2%-of-AGI floor doesn’t apply to gambling losses.
Keep detailed records.
Gambling Losses Under New Tax Law
Although the tax law allows a limited deduction for gambling losses, this write-off isn’t a slam-dunk. Notably, you have to submit documentation to support your claims, including information on the dates and types of wagering activities, the names and addresses of the gambling establishments, the names of anyone who accompanied you at the activities and the amounts won or lost. Typically, you’ll have records of losing tickets, canceled checks and casino credit slips. Also, keep corroborating information (e.g., hotel bills and plane tickets.)
Gambling Losses New Tax Law
Going for broke.
In rate instances, a long shot for a gambling deduction may pay off. New case: An insurance consultant who was a compulsive gambler won about $350,000 during 2014, the tax year in question. But he didn’t produce documentation at trial and instead relied on the “Cohan rule” for an estimate of losses. The Tax Court judge gave credence to the testimony of a gaming expert who concluded that the taxpayer lost more than that amount. Also, the Court looked to the dire financial situation the taxpayer remained in. Result: The loss was allowed (Coleman, TC Memo 2020-146, 10/22/20).