Gambling losses should just offset my gambling winnings, right?
Updated to reflect changes of 2017 Tax Reform
In most cases, the answer to that question is yes. However, in several situations, the offsetting income/loss affects other areas of your tax return. So, it is possible for the gambling losses to offset your winnings but increase your tax bill anyway. It is the nature of how deductions and credits are calculated on your personal tax return (Form 1040).
Gambling winnings are added to income on your personal tax return. This increases your Adjusted Gross Income (AGI). Then, the losses are taken as an Itemized Deduction that deducts from your AGI giving you your taxable income.
Here are six situations where the higher AGI from gambling winnings could cause you to pay more in tax:
Many credits depend on your AGI (Child Tax Credit, Dependent Care Credit, Education credits, etc.). If your AGI is higher than allowed, you could be phased out of those credits. Remember that gambling winnings increase your AGI before the losses offset that income.
If you have rental properties, you are allowed to deduct up to $25,000 of the passive loss from ordinary income. If your AGI is above certain limits, you can not deduct any of the passive loss and you will have to carry it forward.
Medical Deductions are subject to 7.5% of your AGI. So medical expenses are only deductible after 7.5% of your AGI. If you had $10,000 worth of medical expenses and your AGI was $80,000, you could deduct $6000. If you then had $40,000 worth of gambling winnings, you would not be able to deduct any medical expenses because your AGI is now $120,000 and your medical deductions would have to be more than $9,000 to be deductible.
If you normally take the standard deduction rather than itemize, then gambling losses may impact the benefit of the standard deduction. Whatever the amount of the standard deduction is minus the itemized deductions you had would be to your benefit. If you had gambling losses to add and you now itemize, you would no longer be getting that benefit, resulting in a higher tax. Let me put some numbers to it
Filing jointly, you have $6,885 in itemized deductions. The standard deduction for a joint return is $24,000. So, by taking the standard deduction, you benefit by $17,115. If you lost $20,000 gambling that you add to your deductions. Giving you a total of $26,885, you would now take the itemized number, losing out on the $17,115 if you did not have the losses. This results in more tax owed.
Social Security benefits are taxable based on your AGI. They can be anywhere from zero to eighty-five percent taxable. The higher the AGI, the more tax you pay on your benefits.
If your AGI gets high enough, you will have to limit your overall itemized deductions and may not be able to take the full gambling loss deduction. Also, at certain AGI levels, your exemptions for yourself and your dependents begin to phase out, resulting in higher taxes.
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The simple answer to the original question is “yes, the gambling losses offset gambling winnings.” However, the situations above affect many taxpayers with gambling winnings so it possible to owe more tax even with the offsetting gambling loss. Contact us for any Tulsa Tax Services or Oklahoma City Tax Services