If You Are a Recreational Gambler, Here Are Some Tax Issues You Need to Know

Article Highlights:

  • Winnings
  • W-2G Reporting
  • Losses
  • Social Security Income
  • Health Care Insurance Premium Subsidies
  • Medicare B and D Premiums
  • Online Gambling Accounts

Gambling takes many forms: casino games, horse racing, sports book betting, lotto tickets, scratchers, bingo, etc. For virtually everyone, gambling is a recreational activity and, as such, is done for fun. For most gamblers, their losses for the year will exceed their winnings, and since losses in excess of winnings are not deductible, most gamblers don’t bother to report either, which isn’t in line with the tax law’s filing requirements.

If your winnings at one time hit certain levels, the government requires the gambling establishment to collect your Social Security number and report your winnings to Uncle Sam on a Form W-2G. Gambling establishments will issue a Form W-2G if you:

  • Win $1,200 or more on a slot machine or from bingo.
  • Win $1,500 or more on a keno jackpot.
  • Win more than $5,000 in a poker tournament.
  • Win $600 or more from all other games, but only if the payout is at least 300 times your wager.

Reporting Winnings – Many individuals believe that they only have to report the winnings for which they receive a Form W2-G. Unfortunately, the IRS has a different viewpoint. Although you may be able to offset your reported gains with gambling losses, the IRS anticipates that you will also have had gambling winnings that were under the W2-G reporting threshold and will raise this issue during an audit.

Gambling Losses – The good news is that you can deduct gambling losses if you itemize your deductions but only to the extent of your gambling income. In other words, you can’t have a net gambling loss on your tax return. Bad news: if you don’t itemize your deductions, you will have to pay taxes on the entire winnings, even if you have a net gambling loss, as is the case for most individuals.

GAMBLING GOTCHA #1 – Since you can’t net your winnings and losses, the full amount of your winnings ends up in your adjusted gross income (AGI). The AGI is used to limit other tax benefits, as discussed later. So, the higher the AGI, the more the tax benefits may be limited.

GAMBLING GOTCHA #2 – If you don’t itemize your deductions, you can’t deduct your losses. Thus, individuals taking the standard deduction will end up paying taxes on all of their winnings, even if they had a net loss. The recent tax reform brought us significantly higher standard deduction amounts and, for itemized deductions, limited the deduction for state and local taxes and eliminated the deduction for unreimbursed employee business expenses and investment expenses, among other changes. The anticipated result is that fewer taxpayers will be itemizing their deductions and more gamblers will be paying taxes on their winnings.

Documenting Losses – The next logical question is: how are you going to document your gambling losses, if audited? Don’t rush down to the track and start collecting discarded tickets, since they generally aren’t acceptable documentation because of their ready availability. The IRS has published guidelines on acceptable documentation to verify losses. They indicate that an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence to substantiate wagering winnings and losses. In general, this diary should contain at least the following information:

(1) the date and type of each specific wager or wagering activity,
(2) the name of the gambling establishment,
(3) the address or location of the gambling establishment,
(4) the names of other persons (if any) present with the taxpayer at the gambling establishment, and
(5) the amounts won or lost.

Save all available documentation, including items such as losing lottery and keno tickets, checks, and casino credit slips. You should also save any related documentation such as hotel bills, plane tickets, entry tickets, and other items that would document your presence at a gambling location. If you are a member of a slot club, the casino may be able to provide a record of your electronic play. You might also obtain affidavits from designated gambling officials at the gambling facility. With regard to specific wagering transactions, your winnings and losses might be further supported by:

  • Keno – Copies of keno tickets you purchased and that were validated by the gambling establishment.
  • Slot Machines – A record of all winnings by date and time for each machine that was played.
  • Table Games – The number of the table at which you were playing as well as casino credit card data indicating whether credit was issued in the pit or at the cashier’s cage.
  • Bingo – A record of the number of games played, the cost of the tickets purchased, and the amounts collected on winning tickets.
  • Racing – A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records can include unredeemed tickets and payment records from the racetrack.
  • Lotteries – A record of ticket purchase dates, winnings, and losses. Supplemental records can include unredeemed tickets, payment slips, and winning statements.

Other Tax Side Effects of Gambling – Because gambling income is reported in full as income and the losses are an itemized deduction, gambling winnings increase a taxpayer’s AGI for the year. An individual’s AGI is used to limit other tax benefits, and having gambling income can have an adverse impact on your taxes. Here are some examples:

  • Social Security Income – For taxpayers receiving Social Security benefits, whether those benefits are taxable depends upon the taxpayer’s AGI for the year. The taxation threshold for Social Security benefits is $32,000 for married taxpayers filing jointly, $0 for married taxpayers filing separately, and $25,000 for all other filing statuses. If the sum of AGI (before including any Social Security income), interest income from municipal bonds, and one-half the amount of Social Security benefits received for the year exceeds the threshold amount, then 50–85% of the Social Security benefits will be taxable.
    GAMBLING GOTCHA #3 – So, if your gambling winnings push your AGI for the year over the threshold amount, then your gambling winnings – even if you had a net loss – can cause some (up to 85%) of your Social Security benefits to be taxable.
  • Health Insurance Subsidies – Under Obamacare, lower-income individuals who purchase their health insurance from a government marketplace are given a subsidy in the form of a tax credit to help pay the cost of their health insurance. That tax credit is based upon the AGIs of all members of the family, and the higher the family’s income, the lower the subsidy will become.
    GAMBLING GOTCHA #4 – Thus, the addition of gambling income to your family’s income can result in significant reductions in the insurance subsidy, requiring you to pay more for your family’s health insurance coverage for the year. Additionally, if your subsidy was based upon your estimated income for the year, your premiums were reduced by applying the subsidy in advance, and you subsequently had some gambling winnings, then you could get stuck paying back part of the subsidy when you file your return for the year.
  • Medicare B and D Premiums – If you are covered by Medicare, the amount you are required to pay (generally withheld from your Social Security benefits) for Medicare B premiums is normally about $130–$134 per month and is based on your AGI two years prior. However, if that AGI is above $85,000 ($170,000 for married taxpayers filing jointly), then the monthly premiums can more than triple. If you also have prescription drug coverage through Medicare Part D and your AGI exceeds the $85,000/$170,000 threshold, then your monthly surcharge for Part D coverage will range from $13.30 to $74.80 (2018 rates).
    GAMBLING GOTCHA #5 – The addition of gambling winnings to your AGI can result in higher Medicare B and D premiums.
  • Online Gambling Accounts – If you have an online gambling account, there is a good chance that the account is with a foreign company. All U.S. persons with a financial interest or signature authority over foreign accounts with an aggregate balance of over $10,000 anytime during the prior calendar year must report those accounts to the Treasury by the April due date for filing individual tax returns or face draconian penalties.
    GAMBLING GOTCHA #6 – Regardless of whether you were a winner or loser, if your online account was over $10,000, you will be required to file aFinCEN Form 114 (Report of Foreign Bank and Financial Accounts), commonly referred to as the FBAR. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation.
  • Other Limitations – The forgoing are the most significant “gotchas.” There are numerous other tax rules that limit tax benefits based on AGI, as discussed in gotcha #1. These include medical deductions, child and dependent care credits, the child tax credit, and the earned income tax credit, just to name a few.

If you have questions related to gambling and taxes, please call this office.

Minimizing Tax on Social Security Benefits

Article Highlights:

  • Income as a Factor
  • Filing Status as a Factor
  • Benefits Taxable up to 85%
  • Base Amounts
  • Deferring Income
  • Maximizing IRA Distributions

How much (if any) of your Social Security benefits are taxable depends on a number of issues. The following facts will help you understand the taxability of your Social Security benefits.

  • For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before any reductions due to payments withheld for Medicare premiums). For tax purposes, Social Security benefits are treated the same regardless of whether the benefits are paid due to disability, retirement, or reaching the eligibility age. Supplemental Security Income benefits are not included in these computations because they are not taxable under any circumstance.
  • The taxability of your Social Security benefits depends on your total income and marital status.

    o If Social Security is your only source of income, it is generally not taxable.

    o On the other hand, if you have other significant income, as much as 85% of your Social Security benefits can be taxable.

    o If you are married and filing separately, and if you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable—regardless of your income. This is to prevent married taxpayers who live together from filing separately to reduce the income on each return and thus reduce the amount of Social Security income that is subject to tax.

  • The following quick computation can be done to determine if some of your benefits are taxable:

    Step 1. First, add half of your total Social Security benefits to your total other income, including any tax-exempt interest and certain other exclusions* from income.

    Step 2. Then, compare this total to the base amount that is used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.

The base amounts are:
  • $32,000 for married couples filing jointly;
  • $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
  • $0 for married persons filing separately who lived together during the year.
*These exclusions are as follows: the interest from qualified U.S. savings bonds (used for education expenses), employer-provided adoption benefits, foreign earned income or foreign housing income, and income earned by bona fide residents of American Samoa or Puerto Rico.

When taxpayers can defer their non-Social Security income from one year to another, such as by taking individual retirement account (IRA) distributions, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits in a given year. However, the required-minimum-distribution rules for IRAs and other retirement plans have to be taken into account.

Individuals who have substantial IRAs and who either aren’t required to make withdrawals or are making their post-age-70.5 required minimum distributions (but are not withdrawing enough to reach the Social Security tax threshold) may be missing an opportunity for tax-free withdrawals. Everyone’s circumstances are different, however, and what works for one person may not work for another.

If you have questions about how these issues affect your specific situation, or if you wish to do some tax planning, please give this office a call.