Breaking the Code: Gambling Winnings
By: Jeffrey Krueger, CPA, MSA, CFP®
Growing up, I’ve always been fascinated with gambling. Playing card games was common at family gatherings for both quarters and bragging rights. Anything involving numbers, money and competition was more than enough to keep me entertained.
When I turned 21, my dad introduced me to Foxwoods Casino. While I tried unsuccessfully at different games and ended a loser, I was able to hit on a slot machine for an amount big enough to earn me a Form W-2G (tax form stating gambling winnings) at the end of the year. Upon filing my taxes at the end of the year, gambling winnings and losses are reported as such for a casual gambler:
All gambling wins are reported as income on Line 21 of Schedule 1. Gambling losses are allowed as an itemized deduction, dollar for dollar against the gain, but cannot exceed gambling wins for the tax year. (Note that state taxes have different rules regarding the deductibility of gambling losses.)
As my losses exceeded the winnings during that trip, the losses could zero out the gains. However, as a 21-year-old, my itemized deductions (state and local taxes, mortgage interest, charitable contributions) did not exceed the standard deduction ($5,450 at the time). Therefore, I was not able to use the losses to offset the income and had to pay taxes on top of it. It was a lose – lose situation. With the increased standard deduction of $24,000, this situation became more common for individuals in 2018 under the new tax law.
Even if a taxpayer was able to zero out the gambling income, there are still other unintended consequences of gambling winnings as a result of the effect on adjusted gross income:
• Increasing taxability of social security benefits
• Increasing Medicare premiums
• Disallowing certain credits and deductions
Had I known then what I know now, there is an alternative way that could have saved my 21-year-old self some financial pain. The IRS has stated that gambling winnings are not a true win until the gambling session is completed. A gambling session starts when you make your first wager of the day for a specific type of game and ends when the last wager of the day (no later than midnight) is made on the same type of game.
As an example, say you play roulette in the morning, take a break midday, and resume later in the afternoon. In the eyes of the IRS, that is still the same session.
Alternatively, if you play roulette in the morning and take a break to play slots, those would be different sessions. If you then play roulette later in the afternoon of the same day, you are still on that day’s session for roulette purposes, with a different session for slots.
For tax purposes, you would then tabulate your gambling sessions. Any gambling sessions with a net gain are included in income. Any gambling sessions with a net loss are then allowed as an itemized deduction. Let’s look at numbers to make our point:
From the information in the table, using the gambling sessions, we would show $350 in total income (combining all net gains from all sessions) and would also be able to use $200 of the loss in session 2 as an itemized deduction if the taxpayer files a Schedule A for their deductions.
As with most tax related items, documentation is crucial and a log of your sessions is required. However, a little extra work can be the difference in making sure you keep more of your winnings from Uncle Sam.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.