Menu

Tax Strategies & Credits

The Complete Guide to Taxes and Gambling

by
Spencer Wilson
on
10/18/2017
The Complete Guide to Taxes and Gambling

There’s something about gambling that makes it feel like when you lose money, it doesn’t hurt as much as when you simply spend it paying bills, and when you make money it doesn’t feel like income. Unfortunately, that’s not the way the government views your winnings. Even though gambling is essentially a form of sport, any dollars that go into your pocket as a result of this recreational activity still count as income, and is expected to be reported on your tax return. At t­­he same time, your losses count in a completely different way, and you can only deduct a single year’s losses that are greater than what you’ve won in that year.

Keeping track of the specific rules regarding taxes and gambling can be a challenge, especially because there are specific scenarios that can lead to a profound impact on your tax status.  Here is a rundown of what you need to keep in mind before you find yourself caught in one of these situations – as well as some kickers that may feel unfair, but they’re all part of the tax hand you’ve been dealt.   

Scenario #1 – Reported Winnings

If you win money during the course of a tax year as a result of gambling, it must be reported as taxable income on your 1040. This does not only apply to ‘serious gambling’ such as what’s done by high rollers in casinos. Lottery tickets (including scratch-offs), betting on horse and dog races, and raffles all count – and if what you win is not cash, then you need to report the full fair market value of whatever you’ve won, whether it’s a vacation, an automobile, or anything else. Importantly, the amount to be reported is the full winnings – you are not permitted to deduct any losses, even if they occurred on the same gambling outing. You are permitted to deduct a specific cost of playing, such as the cost of the single winning lottery ticket you purchased or the cost of the single winning spin on a slot machine. Even though Form W-2G only specifies certain types of winnings, the IRS still requires that you report all income from gambling. This is especially true when trying to compute and deduct gambling losses for a write-off.

 The Kicker: Winnings and losses can’t be netted out for tax purposes. What you win gets added to your adjusted gross income (AGI) and can have a significant impact on your ability to access other tax advantages. 

Scenario #2 – Reporting Losses

Let’s say you’ve had an overall bad year when it comes to your gambling losses, and you lost a lot more than you won. You can report those losses as a miscellaneous itemized deduction, but only to a certain degree. You are limited to deducting no more than you gained in that year, and the deduction is not subject to the AGI limit of 2%.

The Kicker: If you’re one of those who take the standard deduction and you don’t itemize, you lose all opportunity to deduct your losses. But you still have to pay taxes on your winnings, even if you ended up losing more in a single sitting (or over the course of the year) than you won.

Scenario #3 – Social Security Income

Some Social Security benefits are taxable and others are not. The determining factor is a calculation that takes into account your Adjusted Gross Income without Social Security Income, half of the Social Security Income benefits you receive, and any interest income you earn from municipal bonds. The threshold amount that qualifies people to receive their Social Security benefits tax-free for married taxpayers filing jointly is $32,000, while those who are married but file separately are automatically taxed. All others have a threshold of $25,000. Anybody for whom that total exceeds those thresholds will have between 50 and 85% of their Social Security benefits taxed.

The Kicker: You have to add your gambling winnings to your Adjusted Gross Income, and doing so could very possibly change the equation enough to take you from not having to pay taxes on your Social Security benefits to having to pay tax on as much as 85%. 

Scenario #4 – Health Insurance Subsidies

The Affordable Care Act set up a system whereby individuals whose income is below a certain level and who use the marketplace to purchase their health insurance receive a tax credit to subsidize the expense. In order to determine what the tax credit is, the taxpayer’s family totals up all of their AGIs. The more income a family makes, the lower the tax credit/subsidy they receive.

The Kicker: A good gambling win can mean that your family’s health insurance costs are going to increase substantially because the amount of subsidy that you receive is likely to drop. There’s even a chance that you’ll have to reach into your pocket and pay the government some money back: if you estimated your income for the coming year in order to determine the amount of your subsidy, then you ended up receiving more than you were supposed to and the government will want to be reimbursed. 

Scenario #5 – Medicare B & D Premiums

Medicare coverage only goes so far, so a lot of people choose to extend their coverage by purchasing additional coverage in the form of Medicare Part B and Medicare Part D for prescription drugs. The premiums for Medicare B are based on Adjusted Gross Income for the two years prior to the current tax year, and the monthly costs for those whose income is $85,000 or less (or $170,000 for married taxpayers filing jointly) are between $109 and $134. Once your AGI exceeds that threshold, the premium costs increase dramatically, and can more than triple to $428.60 per month. The same threshold is in place for Medicare Part D, and for 2017 those costs can jump from $13.30 per month to $76.20.

The Kicker: Because gambling winnings get added to your Adjusted Gross Income, they can have a significant impact on the amount that you have to pay for your health insurance extras. 

Scenario #6 – Online Gambling Accounts

The popularity of the internet has changed our lives in many ways, and online gambling is one. Though the site that you use may feel just as comfortable and familiar as a casino in Atlantic City or Vegas, chances are that it is actually not located in the United States. That means that if you have an account set up with one of these sites, you officially have signing authority over a foreign account, and there are special rules that apply if over the course of the prior tax year your aggregate balance was over $10,000. In that case, you are required to notify the Treasury no later than the date that your taxes are due. Failing to do so can result in significant penalties.

The Kicker: Opening an account with an online gambling site and having more than $10,000 in it at any one time means more tax paperwork. You’ll need to fill out a form known as the FBAR, or Report of Foreign Bank and Financial Accounts. Also known as FinCEN Form 114, this form has meant heartache for many gamblers, as even non-willful violations can create civil penalties of up to $10,000. If you purposely fail to file the FBAR the fines can be even more draconian, and reach up to either $100,000 or half of the balance of the account at the time of the violation – whichever is greater. 

A Few Final Thoughts on Gambling and Your Taxes

The scenarios described above are all the most common areas where gambling winnings can impact tax benefits, but they are by no means the only ones. Tax winnings can impact any tax deduction or loophole that is based on Adjusted Gross Income, including the child tax credit, exemptions, and earned income tax credit. If you have won or lost as a result of gambling, you cannot simply view it as a windfall. You need to speak to an experienced tax services provider to find out exactly how it will impact you.

Spencer Wilson writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

share this post
Search for matches...
Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

SPENCER WILSON FINANCIAL MANAGEMENT SERVICES
★ ★ ★ ★ ★
27 reviews

California

Firm Profile

Recommended Professionals

In the face of economic uncertainty, TaxBuzz is the industry's most up-to-date tax information.

Join 60,000 who get our weekly newsletter. No spam.

We know tax and accounting issues are complicated.

Do you have additional questions on this topic for this author?

Related Posts

Latest Posts