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Gambling Loss Deductions

Updated on July 14, 2016
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Rules for Deducting Gambling Losses: Many people wonder why gambling losses rarely result in any significant reduction in tax liabilities on their tax return. For most people the amount of the gambling losses are so little that they do not care to know why the losses have no effect. For others not receiving a tax benefit for their large losses are infuriating. This article will discuss the rules for gambling losses and how they influence the outcome of one’s tax return.

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Itemized Deductions: Taxpayers have the right to either take a standard deduction on their return or the itemized deductions, but not both. The standard deduction is a set amount allotted to a taxpayer to offset their adjusted gross income. The amount of the standard deduction is based on a taxpayer’s filing status, age, whether someone can be claimed as a dependent, and whether someone is disabled. The standard deduction is normally the default deduction, especially if one uses software to help them prepare their taxes, unless one chooses to take the itemized deduction. Normally, one will select to use the itemized deductions if the cumulative amount of itemized deductions exceeds the standard deduction. However, if you choose to take the itemized deduction then you are required to maintain adequate records to prove out your claimed itemized deductions. Due to the fact that many people do not maintain adequate records for their itemized deductions some may choose to forgo the itemized deductions and stick with the standard deduction.

Additional Note: If you are married and are filing a married filing separate return, if one of you itemizes your deduction then the other spouse must also itemize their deductions on their return. There is an exception to this rule if a party filing a separate return qualifies to use the Head of Household designation. However, in order to use the head of household designation the married couple can not have lived together at all (even for one day) during any part of the last 6 months of the year; and that person had to have paid more than half the cost of keep­ing up a home for the year; and a qualifying person lived with the person trying to file as head of household in the home for more than half the year (except for temporary absences, such as school). However, if the qualifying person is your dependent parent, he or she doesn't have to live with you.

Examples of Itemized Deductions: Mortgage interest deduction, property tax deductions, medical expense deductions, local and state tax deductions, charitable deductions, gambling losses, casualty & theft deductions, etc.

Gambling Losses: Gambling losses may only be taken if you choose to itemize your deductions. Additionally, gambling losses have another restriction in that the amount of gambling losses that may be recognized on one’s return are limited to the amount of gambling winnings for that particular tax year. Any remaining losses above and beyond one’s gambling winnings cannot be used nor will the losses be carried over to a subsequent tax year to offset income. If you are able to recognize gambling losses for the tax year you can claim these loses on Schedule A as an Other Miscellaneous Deduction on line 28 of the form.

As always, remember that is you take an itemized deduction that it is important to maintain adequate records of your gambling winnings and losses. Maintaining receipts, tickets, journals and other records of your losses is imperative less than IRS denies your deductions.

Example Tax Calc: Std vs Itemized Deduction

Chooses Standard Deduction
-
Chooses Itemized Deduction
 
 
 
Income = $35,000
 
Income = $35,000
Minus Std Deduction = $6,300
 
Minus Item Ded = $5,000
Minus Exemp = $4,000
 
Minus Exemp = $4,000
Taxable Income = $24,700
 
Taxable Income = $26,000
Tax @ 10% = $2,470
 
Tax @ 10% = $2,600
Example: Single taxpayer has $30,000 in wages, $5,000 in gambling winnings, $6,000 in gambling losses. The personal exemption rate for a single taxpayer for 2015 is $4,000. The chart below will show the outcomes if one chooses the itemized deducti

Standard Deduction Chart for Tax Year 2015

If your Filing Status is
-
Standard Deduction
Single
 
$6,300
Head of Household
 
$9,250
Married Filing Jointly
 
$12,600
Married Filing Separately
 
$6,300
Qualifying Widow(er)
 
$12,600

State Laws for Gambling Winnings and Losses: How your state handles gambling winnings and losses may differ from how they are handled on the federal return. Make sure you consult your state's tax return filing instructions for more information. Some states do not tax a certain level of gambling winnings, and therefore do not allow for corresponding gambling losses. For other people you may have won money in a state with no income tax, but live in a state with income tax. If this occurs you may still be liable for taxes on your winnings to your resident state, even though the state you won the money in does not have an income tax. If you win money in a state with an income tax, and live in a state without an income tax you may find that you need to pay and file a tax return in a non-resident state if you meet certain income thresholds. Lastly, if you win money in a state with an income tax and live in a state with an income tax then you may need to file two tax return and claim the income on both return. When this occurs you will normally get a credit for your resident state return to offset any taxes you paid in the non-resident state to help alleviate double taxation.

Conclusion: Always make sure that you maintain adequate records to prove out your gambling losses. Failure to maintain adequate records of your losses can result in the IRS denying your gambling loss claims. This will result in a higher taxable income and more taxes and possible underpayment penalties. Also, understand that the gambling losses which you may deduct in a particular tax year can only be equal to the gambling winnings you had in that same year. You cannot carry over losses from a prior year to offset winnings in another year.

If you are using a tax software program like Turbo Tax, H&R Block, Tax Act, etc to prepare your taxes and you do not see any reduction in your taxes when you add in your gambling losses then it is a good chance one of the following has occurred:

  • Your recognizable itemized deductions do not exceed your standard deduction, and therefore you are getting no benefit from your itemized deduction. Please note that most tax software programs automatically include a standard deduction in your tax return as a starting point based on your personal information that you put in the program. As such, you will not see any change in your taxable refund or tax due when you put in your itemized deductions until your recognizable itemized deductions exceed your standard deduction.
  • Your taxable income is already so low that other deductions, exemptions, credits has resulted in you not paying any taxes. Please note that while "credits" technically" come after your deductions on the calculation of taxes, if you are using a tax software program the credits are already included in most calculations after you put in your personal information and some other relevant information.

To learn more about various areas of taxation, click the articles below:

More about tax rules:

  • Mortgage Interest Deductions: Mortgage Interest Deductions are "itemized deductions" which may help you lower your taxable income, and therefore your tax liability. Mortgage Deductions are subject to several limitations.
  • Contributions to a Traditional IRA: Contributions to a traditional IRA "may or may not" result in a deduction to gross income. One's filing status, modified adjusted gross income, earned income, and whether they are covered under a retirement plan at work can effect one's ability to take a deduction for a contribution to a traditional IRA.
  • Student Loan Interest Deductions: Payments of one's student loan interest may result in a tax deduction based on whether the interest is on a qualifying student loan, and the taxpayer meets certain eligibility requirements.
  • Roth IRA Contributions: Contributions to a Roth IRA do not result in tax deductible savings on one's tax return. However, Roth IRA investments have other great tax benefits later on in life, such as being able to possibly take distributions from the account (both contributions and income earnings) tax free "if" the recipient meets all of the requirements.

© 2016 James

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