New Tax Rules Concerning Gambling Activities

The Internal Revenue Service (IRS) has historically required that pxj00 winnings and gambling losses be separately accounted for. The reason for this has to do with the way gambling losses are deducted for tax purposes. Gambling losses are treated as an itemized deduction and reported on Schedule A of the individual income tax return (Form 1040). This creates a problem in the cases in which taxpayers cannot itemize (as is the case when a standard deduction is greater) or in which the taxpayer’s income exceeds a certain threshold (in which case the taxpayer loses part of their itemized deduction via a phaseout). In such cases the taxpayer does not get the full benefit of the gambling losses to offset against the gambling winnings. What the IRS is really after is the reporting and taxation of gross gambling winnings.

New Tax Rule:
According to a recent tax court case (Shollengerger, TC Memo 2009-36) taxpayers are allowed to net gambling winnings during a given day with gambling losses. This is a significant setback to the IRS. As an example, imagine if you were to win $2,000 in the morning at a casino and lose $900 later that afternoon. Prior to this court case, the IRS would require that you report the $2,000 in gambling winnings and then separately itemize the $900 in gambling losses on your tax return. The court instead ruled that the taxpayer in this case was permitted to net the gambling winnings for the day and report $1,100 as net gambling winnings instead of the $2,000 gross amount, the IRS mandated. The court went on to state that this “netting rule” only applied on a daily basis. It stated that a taxpayer could not net gambling winnings and losses for the entire year.

Tom is a Certified Public Accountant, a Certified Financial Planner, CLTC (Certified Long-Term Care) and President of Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works with clients helping them manage their money, retirement planning, college savings, life insurance needs, IRAs and qualified plan rollovers with an eye towards maximizing tax benefits and minimizing taxes. Tom is founder of the Rich Habits Institute and author of “Rich Habits”.