Enrolled Agent and Certified Legal Document Preparer
You’ve reached your golden years, retired from your job, and now it’s time to relax and enjoy life. Many retirees living in the Prescott area enjoy visiting the casinos and taking their chances with Lady Luck. Sometimes Lady Luck beams her elusive smile, the slot machine lights start flashing, and the machine makes noises like coins are pouring out. Prescott Tax and Paralegal brings you the following to think about:
These days, coins don’t actually pour out of the machine, darn it. Casinos must report jackpots to the IRS as gambling winnings on form W2-G, and mail the winner a copy by January 31 of the following year.
If you have registered with one of the casino clubs, they will often provide you with a Cash In - Cash Out Statement. Usually these statements show an overall loss for the year, despite the jackpot winnings. No problem, you can deduct the losses up to the amount of your winnings on your Schedule A as an itemized deduction, but only if you have enough expenses to itemize.
So, where is the hidden tax? Gambling winnings increase income, which then increases the amount of social security which is taxable. Here’s an example for a married couple filing together. Albert & Betty, who are retired, have $28,000 in social security income and an IRA distribution of $20,000. They do not have enough expenses to itemize deductions. Currently, $1000 of their social security benefits are taxable and their combined federal and state tax is $180.
They decide to play the slots, and win a $6000 jackpot. Now, $4000 of their social security benefits are taxable. This means their income increased by $10,000: the jackpot plus the increase in taxable social security. Their combined federal and state tax owed increases to $1367. Yikes! Their overall gambling loss for the year is $3,000 which they cannot deduct because they don’t have enough expenses to itemize deductions.
Compare this to Albert & Betty “gambling” in the stock market. They buy Snake Oil stock and sell it at a $6000 profit. They also buy Gump Shrimp Co. stock and sell it at a $6000 loss. The two sales offset each other and there is $0 income to report. There is no increase to taxable social security, and no increase in the tax owed.
Why doesn’t it work this way with gambling income? Under the current IRS laws, even though you have a net gambling loss, or $0 total gambling income when you total all your wins and losses, you must report the winnings as income. You may only deduct losses up to the total amount of winnings, and only if you have enough deductions to itemize. The net result is a hidden tax increase caused by gambling winnings, particularly for retirees because of the increase in taxable social security.
For those of you who gamble, you can’t win if you don’t play. But, if you win, you might pay more taxes even if you have a net loss for the year because of this hidden tax.
Have a question? Prescott Tax & Paralegal is ready to help. Call us at 928-778-3113 or visit us at http://www.PrescottTax.com.
Prescott Tax & Paralegal, the office of Arlene Rheinfelder, AZCLDP is at 141 South McCormick, Suite 206, Prescott, AZ.
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