The Tax Code doesn’t treat casual gamblers very well. On the one hand the odds are stacked against you winning (those fancy casinos were built on losers, not winners). And on the other hand winning can be worse than losing when the taxman gets a hold on you.
Recent tax law changes turned a bad situation worse. The higher standard deduction means fewer people will benefit from deducting gambling losses since you need enough itemized deductions to exceed the standard deduction before the gambling losses reduce your tax liability.
Then we have issues with state tax returns. If the federal tax return doesn’t treat casual gamblers with respect, state tax returns can be down right rude. Wisconsin, for example, doesn’t allow any gambling losses against wins as an itemized deduction: if you lose, you lose; if you win, you lose.
Before we explore strategies for deducting gambling losses we need to review the rules as they stand.
Gambling Wins and Losses on a Tax Return
Gambling wins are reported on the front page of Form 1040 for tax years 2017 and prior. Gambling wins are reported on Schedule 1, Line 21 for tax year 2018.
All gambling wins are required to be reported even if the casino doesn’t report the win to the IRS. Gambling wins are reported on a W-2G for:
- bingo or slot wins of $1,200 or more (not reduced by the wager),
- $1,500 or more (reduced by the wager) for Keno, or
- $5,000 or more (reduced by the wager or buy-in) for poker,
There are certain instances where a W-2G is issued for other gambling winnings of $600 or more.
Losses are allowed as an itemized deduction dollar for dollar against the gain. Gambling losses cannot be greater than gambling wins for the tax year.
Example: John wins $23,500 during the year playing slots and other casino games. His gambling losses are $37,900. John reports his $23,500 of wins on Schedule 1 and $23,500 as an itemized deduction on Schedule A. The additional losses are not deductible. If John doesn’t have any other itemized deductions and is married he is better off taking the $24,000 standard deduction. He derives no additional benefit from the gambling losses while he pays tax on the wins.
When it comes to state taxes some states do not allow any gambling losses, even against gambling wins. This creates a unique situation. In Wisconsin, for example, you can win a million dollar jackpot and go on a gambling spree losing it all and end up with a huge state income tax bill because none of the losses can offset the win. For federal you would report the income and deduct the losses on Schedule A; very little additional tax, if any, would result on the federal tax return.
Gambling wins reported on Form 1040 can cause other serious tax issues even if you can deduct losses on Schedule A. Many credits are affected by adjusted gross income. Losses are deducted further down the return so gambling wins can reduce or eliminate:
- Education credits,
- the Earned Income Credit, and
- the Premium Tax Credit
In addition to lost credits, gambling wins can reduce or eliminate:
- IRA deductions or Roth contributions allowed
- Passive Activity losses, and
- affect the Alternative Minimum Tax
And if this isn’t enough, your Social Security benefits could be taxed more and Medicare premiums pushed higher.
The above lists are not inclusive either! The tax issues from a gambling win can hurt you in many more ways.
But there is a solution to all the tax pain.
When you consider the tax implications of a casino win you might want to think twice about gambling. While I’m not a fan of gambling, since it isn’t conducive to financial independence, I still understand some people enjoy casino games as a form of entertainment. A certain accountant once tried his hand at card counting to reasonable success.
I’m not here to judge. If you gamble I want to assure you have the best information to reduce your taxes on wins.
The basic tax rules above (report all gains and itemize losses to the extent of gains) are valid, but there is a better way. Enter gambling sessions.
The IRS in 2008, and later clarified in 2015, created rules for deducting gambling losses called gambling sessions.
The idea was a gambling win wasn’t really a true win until the session was completed. The Tax Court ruled it is impractical to record each and every wager (pull of the lever, deal of the cards or throw of the dice) and therefore wins and losses can be tabulated for each gambling session versus each hand of cards played, et cetera.
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 is made on the same type of game.
Gamblers need to take extra caution not to mix different types of wagers when calculating sessions. Slot machines are different from blackjack, blackjack different from poker, and poker different from craps.
Example: You play slots in the morning and take a break for lunch and return to the one-armed bandit. This is still the same session.
Example: You play slots for an hour and then move to craps. The slots and craps wagers are different sessions. If you later return to slots the same day you are still on that day’s slots session.
Tax Tip: IRS guidance says a gambling session ends when the clock strikes midnight. This is somewhat true. Playing late into the evening could cause two separate sessions in the same sitting. You can choose to use a calendar day or any 24 hour period as long as it is consistent. Consistency is the key. You can call a day from noon to noon the next day or 5 p.m. to 5 p.m. the next day. Your day should be consistent for the entire year for all gambling sessions.
Extra Gambling Deductions
Let’s use a live example to illustrate the valuable deductions allowed with sessions and an extra deduction for losses not allowed by sessions.
The above sessions log is for a casual gambler who had four sessions throughout 2017. For calculating a session you can use your starting “money in” and netting your “money out” at the end of the session to determine your gain or loss for the session. Inside each session large wins could exist. For example, on February 2nd John may have won a $12,000 jackpot and received a W-2G, but by the end of the session he had only $700 left for a net $200 sessions gain.
John will report $900 of gains on his tax return regardless the gains inside a single session. Losses are not allowed against gains for between sessions.
The $900 gain will end up on Schedule 1 (Form 1040) and will be subject to tax and may affect other deductions and credits on the return. You can also deduct $900 of the additional losses on Schedule A if you itemize! (The $900 sessions gains on Form 1040 can be still be deducted from other losses on Schedule A.) The sessions will always break even (unlikely) or net out as a gain because losses are not allowed between sessions. But unused losses from sessions can be deducted on Schedule A against session gains.
Reporting Sessions Without Getting Audited
Reporting gambling sessions can cause a problem with the IRS computers and cause an unwanted envelope arriving in your mailbox.
Remember when we said you could have a gambling session with a $200 gain (February 2nd above)? Well, inside that small gain could exist a large gain with a W-2G issued. If you only report a $200 gain when the IRS has W-2Gs showing thousands in wins you will get a bill for the difference.
Yes, in the above example only $900 of gains are reportable. But you need to tell the IRS computer what it wants to hear. You could always attach a statement to the return, but the IRS computer may not pick it up before a nasty gram goes out or a full audit triggered.
The best way to handle this is by modifying your sessions reporting on the tax return. Let’s assume the February 2nd session above contained a $10,000 win. Your log will read exactly as above if those are your “money in” and “money out” numbers. But you will report the February 2nd W-2G gain of $10,000 and $9800 of “money in” called gambling losses on the return for a net of $200 again.
Let me see if I can make this clearer.
When I prepare a tax return I enter all the W-2Gs first. This tells the IRS computer I didn’t miss any gambling wins. Then I go the the client’s log and net the difference to arrive at the correct answer.
I still attach the log to the return. This nips an audit before it begins. The attached log allows an auditor to reconcile your sessions without opening a full audit, saving you time and aggravation.
The thing to remember is that your gambling sessions bottom line must be accurate. Adjustments sometimes need to be made so the IRS computers don’t start smoking.
From the above example you can combine all sessions when reporting on the tax return. (Still attach your sessions log to verify the reported sessions gains.)
Let’s assume for our final example that John started with $500 on February 2nd, won a $10,000 jackpot and kept playing until he had only $700 left. The other sessions had no W-2G wins.
Here is how I’d report John’s sessions on his tax return:
- Gambling Income: $10,000
- Gambling Sessions Losses: $9,100
The tax return only needs this one simple combined sessions reporting to arrive at the correct $900 of gambling gains. Remember to deduct the excess allowed on Schedule A (losses up to total gains not reduced by sessions losses).
Gambling can be exciting and fun. Winning is best of all. Just make sure you don’t pay a penny more in tax than you have to. The deck is already stacked against you by the IRS and casino. Don’t throw your winnings away, too.
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The Tax Cuts and Jobs Act enacted late last year opened a variety of opportunities for average people to reduce their tax burden. The biggest advantage of the tax cuts for individuals is the reduced tax rates and extension of income in the lower brackets. Itemized deductions also pay a serious role in how the changes in the code will affect your final results next spring.
Gaming the standard deduction was less of an issue in the past. Now, with the standard deduction at $24,000 for joint returns ($12,000 for single filers and $18,000 for head of household) there is ample opportunity to reduce your tax bill. Exemptions are gone so many will face higher taxes in this area. State and local taxes (SALT) are limited to $10,000 in 2018 – 2025. With the standard deduction so high and SALT limited to such a low level, most people will no longer need to itemize.
For every problem there is a solution. Today we will cover each deduction on Schedule A and look for alternatives. Pulling deductions from Schedule A (even if you don’t itemize) and deducting them elsewhere on the return is akin to legally double dipping. That is our mission. We want to have our cake and eat it too. If we play this right you should manage a big juicy standard deduction while deducting a large portion of each expense as well.
Medical and Dental Expenses
Medical expenses were always a high hurdle to overcome with the 7 ½% (10% in some cases in the past) of AGI reduction of qualified medical expenses. There are several ways to remove numbers from this section and deduct them elsewhere.
If you have a qualified medical plan you can contribute to a health savings account (HSA).
Your employer may offer a Health Reimbursement Arrangement (HRA). The employer sets the amount available to employees. Unused portions can be rolled into the following year if the employer allows. If unused funds are not allowed to roll to the next year it becomes a “use it or lose it” plan.
Certain restrictions exist for self-employed persons. People with a side gig/side hustle or small business can use a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). QSEHRAs require administration. The cost is minimal, but the rules complex enough that you will want professional help. My office recommends Take Command Health for administration. The tax savings are well worth it.
Employers may cover annual physicals and other medical expenses as an employment requirement. The cost is born by the employer and the employer also gets the deduction.
Investment property owners and those with self-employment income can also shift some medical expenses from Schedule A. Small business owners can deduct most medical insurance premiums on the front page of Form 1040 as an adjustment to income. A landlord who is hurt while working on an investment property will have a medical expenses related to the investment property and are therefore deductible against the rental income. A self-employed semi driver can shift medical expenses required to drive a commercial vehicle from Schedule A to the business part of the tax return.
State and Local Taxes (SALT)
This is the issue that started all the problems. There is a cap on SALT deductions of $10,000 from 2018 – 2025 unless Congress changes the code. Several high tax states have devised plans to work around the issue, shifting the expense to the charitable contributions line of Schedule A. The IRS nixed the idea and at least two states have sued. Because the IRS allowed similar schemes in the past when it involves college funding the court will have a serious consideration on its hands. When the issue clears up I’ll let you know.
The problem affects all states. The higher your income, the more likely this becomes an issue. Texas, a state with a reputation for low taxes is really a high tax state. The sales tax and property taxes more than offset the income tax free part of the Texas tax code.
We don’t have to wait for the courts to decide the outcome before we skin this cat. (My apologies to all the cat lovers of the world. For the record, my cat, Pinky, just clawed me in protest as I wrote this.) Property taxes can be partially shifted to an office in the home if you have a business or investment properties. The office in the home must be “regular and exclusive” and it is worth the effort to meet the tax code requirements.
Be sure to report personal property taxes related to a business or investment property on the appropriate form and not on Schedule A where it has limited value.
Interest You Paid
There is more incentive than ever to pay off the mortgage early. You can shift some of the mortgage interest to an office in the home as proffered above.
Investment interest has significantly reduced value under the new tax rules. Margin accounts should be avoided. They’re a bad idea to start with (buying investments with borrowed funds) and the deductibility of the expense is now also limited.
Gifts to Charity
There is some minor good news on charitable deductions. Cash donations were limited to 50% of AGI in the past with the remainder carried forward for up to five years. The deduction limit for cash is now increased to 60% of AGI.
Still, the goal is to reduce Schedule A to a nonevent on your tax return. If we reduce deductions to less than the new higher standard deduction we can, in effect, double dip.
I’ve published on this strategy in the past. The strategy is more powerful than ever under the new rules. Taxpayers with business income or investment properties can shift normal contributions to charity into promotional/advertizing expenses for the business.
It works like this. Instead of donating to the charity of your choice, ask the charity about any upcoming events and sponsor said events. Your business or rental properties get a nice plug in the brochures handed out at the event and probably a prominent display of your company logo and contact information. While this may not be the best way to grow a business, it is a powerful way to build community goodwill for your company! It’s also a business deduction. You can support your favorite charities and get a deduction, too.
Landlords need caution when applying this strategy. Deducting a $20,000 sponsorship when you only have one small duplex in the low rent side of town is unlikely to pass the sniff test! On the other hand, if you have five duplexes around town and you sponsor an event for $1,000, it probably falls within acceptable parameters. Landlords should have a business name: ABC Rental, LLC, for example. By having all your properties under one umbrella it allows the sponsorship to promote all your properties.
Casualty and Theft Losses
The Tax Cuts and Jobs Act eliminated casualty and theft loss deductions except for casualty losses in federally declared disaster areas. Even if you are in a federally declared disaster area, the first $100, plus 10% of AGI, doesn’t count. Example: If your AGI is $100,000, the first $10,100 of casualty losses in federally declared disaster areas doesn’t count.
There are few options if you suffer one of these losses. Business owners can deduct the loss as a business expense.
The loss/theft might qualify as a capital loss. This is a stretch for most situations, but you should be aware of the possibility in case it happens. Capital losses are reported on Schedule D where there are no restrictions like Schedule A. Schedule D losses are limited to $3,000 per year, plus all capital gains.
Casualty and theft losses are reduced by insurance coverage. If all or most of the loss is covered by insurance there is little or no opportunity to deduct expenses. More than ever, adequate insurance of assets is indicated.
Miscellaneous Expenses, Subject to 2%
Miscellaneous expenses, subject to 2% of AGI are eliminated for 2018 – 2025 under the current code. There are still a few planning opportunities for those who plan.
Unreimbursed employee expenses is the biggest issue in this section. It is important to have a serious discussion with your employer on your out-of-pocket work expenses. Your employer gets a full deduction on most of these expenses while you get nothing if they are not reimbursed! It might be worth a salary adjustment to make room for reimbursed expenses. Example: If you typically have $5,000 per year of work expenses, any salary reduction less than $5,000 with full reimbursement of work related expenses is a win for you and a nice tax deduction for the employer. Employers: this can be a valuable employee perk that pays both you and the employee. A true win/win.
Tax preparation fees are only deductible as they apply to the business or rental property portion of the return. A lot of accountants miss this. If your tax preparation fee is $500, a portion is for the personal part of your return (no longer deductible) and a portion is for the business (Schedule C and other related business forms) and rental property part of the return (Schedule E). Ask your accountant to break out the prep fee (required by the IRS to deduct). Your accountant can list $250, for example, as the portion of the prep fee attributed to the business portion of your personal tax return. This $250 can be deducted on the appropriate forms (Schedule C for small business, Schedule F for farms and Schedule E for income properties).
A safe deposit box used for business or income properties is deducted on their respective area of the return instead of Schedule A.
This section of Schedule A catches a lot of minor deductions. Think the deduction through before writing it off (pun intended). On Schedule A it is now worthless. But, if it is an expense related to a business or rental property . . .
Union dues are the remaining big item. I wish I had an answer. If any of you kind readers have a suggestion, let me know. Union dues are no longer deductible until the tax code changes or I figure out a work around. Don’t hold your breath.
Other Miscellaneous Deductions
This is the last section of deductions on Schedule A. These deductions are not reduced by 2% of AGI.
We will focus on the two most common items reported in this section: gambling losses and claim repayments.
Gambling losses are reportable on Schedule A up to gambling winnings. The best way to avoid tax problems is to stop gambling! The odds are against you. As budding accountants you know better. There, I said it. Now on with the show.
If you insist on gambling, at least keep a daily log of your results/sessions. You can use gambling sessions to remove losses attributable to gains in the same session on the front page of Form 1040. Most states follow federal on gambling sessions so the tax advantage stretches to the state return for most taxpayers.
Gambling sessions don’t remove all the losses from Schedule A, but it should shift a serious portion of the losses from Schedule A to the front page of 1040 where they have value. You can read more about gambling sessions here.
The other big item in this section of Schedule A is claim repayments. We are not talking about business or investment property repayment issues. Those are reported on their respective forms.
A common repayment is unemployment benefits. The claim repayments reported on this section of Schedule A are taxable items of income on a previous tax return. Repayments of items not reported as income on a prior return are not deductible.
We’ll use unemployment benefits as our example. Repayments made in the year the income was received is adjusted where the income is reported. Example: You receive $2,800 of unemployment benefits and are later required to repay $200 of the benefits. You repaid in the same year you received benefits. You adjust the reported $2,800 to $2,600. No itemizing required.
All claim repayments reported as income in a prior year under $3,000 must be reported on Schedule A. Repayments over $3,000 can also be reported on Schedule A, but you want to use an alternative method. There is a planning opportunity here.
For repayments over $3,000 you can calculate a credit for the repayment, reporting the credit on page 2 of Form 1040 (line 73 on the 2017 return). In the margin write 1341, to inform the IRS of the code section you are using for your right of claim.
You calculate the credit by going back to the return the income was reported on. Calculate the prior return without the income repaid in the current year. The reduction in tax is the credit.
I covered what I feel will be over 90% of the issues surrounding Schedule A and the available solutions for moving the deduction to another area of the return. This, in effect, allows a bit of double dipping. You still get the new, outsized standard deduction while still claiming a serious portion of the actual expenses.
Unfortunately, not everyone will benefit from these strategies. However, with the volume of options provided there should be at a least a few options available to most readers.
If you have any creative ideas to divert deductions from Schedule A to areas of the tax return where they have value I’d be happy to hear them.
Remember, an expense is worthless until you get a write-off.
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