Gambling Deductions Tax Reform

Gambling professionals who earn a profit may qualify for the pass-through tax deduction established by the Tax Cuts and Jobs Act. This deduction permits business owners to deduct up to 20% of their net business income from their income taxes. The deduction took effect in 2018 and is scheduled to last through 2025. The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. The Tax Cuts and Jobs Act brought significant changes to many individual tax regulations, including those dealing with the standard deduction and itemized deductions. There are several factors to consider that may change whether the standard deduction or itemized deductions are more beneficial for you beginning in 2018.

Gambling Deduction Tax Reform

As a result of the December 20, 2017 Tax Reform legislation, the following items will affect your Tax Year 2019 Tax Return.

• Changes the Seven Tax Rates: The new rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. They will phase out in eight years.
• Doubles the Standard Deduction: The standard deduction amount is increased from $6,350 to $12,000 for Single and Married Filing Separately filers, $12,700 to $24,000 for Married Filing Jointly and Widow filers, and $9,350 to $18,000 for Heads of Household.
• Eliminates the Personal Tax Exemption: The doubled standard deduction replaces the personal tax exemption.
• Eliminates Some Itemized Deductions Subject to the 2% AGI floor for Eight Years
• Eliminates Income Phaseout on Total Itemized Deductions for Eight Years
• Decreases the Mortgage Loan Amount Limit for the Mortgage Interest Tax Deduction: For new loans starting in 2018, taxpayers can deduct their mortgage interest of a loan up to $750,000 ($375,000 for Married Filing Separately taxpayers). This is a decrease from the current loan amount of $1 million. It will go back to the original $1 million amount in 2026.
• Increases the Tax Deduction for Charitable Contributions: The limit for charitable cash donations to public charities and certain other organizations increases from 50% to 60% (except deductions combined with preferred seating at college sports events). The charitable standard mileage rate stays at 14% with no adjustment for inflation.
• Increases the Child Tax Credit: The Child Tax Credit is increased from $1,000 to $2,000 per child (first $1,400 is refundable). The credit will start to phase out at $400,000 and more than $200,000 for other taxpayers. This increased amount would phase out in eight years.
• Adds a New Tax Credit for Non-Child Dependents: There is a new $500 nonrefundable tax credit for non-child dependents/parents who are U.S. citizens. The credit can be applied to children over 17 years old, senior parents, or children with disabilities. The dependent’s Social Security Number (SSN) must be issued and provided to the IRS by the due date of a tax return in order to qualify for the credit.
• Reduces the State and Local Tax Deduction: State and local property taxes up to $10,000 can be deducted, in addition to income taxes or sales taxes.
• Decreases the Medical Tax Deduction Rate: The Medical Tax Deduction rate is decreased from 10% to 7.5% for 2017 and 2018 Tax Returns, regardless of age. It will rise back to 10% in 2019.
• Eliminates the Moving Expenses Deduction: You can no longer deduct moving expenses related to a new job (there are some exceptions for active duty military). These expenses include the use of a vehicle as part of a move. This will expire in 2025.
• Eliminates the Tax Deduction for Casualty and Theft Loss: All tax deductions for casualty and theft loss are eliminated (except for those losses attributable to a federal disaster as declared by the President) from 2018 to 2025.
• Eliminates the Tax Deduction for Educator Expenses
• Eliminates the Tax Deduction for Tax Return Preparation Expenses
• Doubles the Estate or “Death” Tax: The Estate Tax amount is doubled from $5.5 million to $11.2 million ($22.4 million for married taxpayers), which will increase with inflation. The doubled amount will expire on December 31, 2025.
• Eliminates the Individual Health Care Tax Penalty: The tax penalty for not having health insurance will be eliminated in 2019. This means you would still be required to pay the penalty in 2018 (for 2017 Tax Returns) and 2019 (for 2018 Tax Returns), but not in 2020 (for 2019 Tax Returns).
• Eliminates Roth IRA Reconversion: If you converted your traditional IRA to a Roth IRA, you can no longer reconvert it back to an traditional IRA. Initial conversions from traditional Roth IRA are not affected.
• Includes All Gambling Expenses as Deductible Losses Up to Amount of Total Winnings
• Eliminates Home Office Deduction for Employees
• Eliminates Business Mileage Rates As Itemized Deductions For Un-Reimbursed Employee Travel Expenses

Gambling Deductions Tax Reform Withheld

Tax Reform Changes for Tax Years 2019 and 2020

• Eliminates the Tax Deduction for Alimony (only applies to payments required under a divorce or separation agreement made after the end of 2018)

What is Not Changing in Tax Reform

Here are items from the current tax code that will not change:

• Earned Income Tax Credit: The maximum amount is $6,444 for taxpayers filing jointly who have 3 or more qualifying children.
• American Opportunity Tax Credit
• Student Loan Interest Deduction
• Adoption Tax Credit
• Alternative Minimum Tax: The amounts permanently adjusted for inflation are $70,300 for Single and Head of Household filers, $109,400 for Married Filing Joint filers and widowers, and $54,700 for Married Filing Separately filers.
• Tax Deductions for 401K and IRA Retirement Savings Options
• Capital Gains and Dividend Rates
• Investment Interest Expense Tax Deduction
• Real Estate Tax Deduction for State and Local Property Up to $10,000
• Home Office Deduction for Self-Employed Taxpayers

Gambling Loss Deduction Tax Reform

1. Doubles the Standard Deduction: The standard deduction amount is increased from $6,350 to $12,000 for Single and Married Filing Separately filers, $12,700 to $24,000 for Married Filing Jointly and Widow filers, and $9,350 to $18,000 for Heads of Household.
2. Still, if you planned carefully (aka bunched your deductions), you might have been able to use the miscellaneous deduction. But for tax years 2018 through 2025 (or longer if Tax Reform 2.0 is enacted; it cleared the House this morning, but odds are against it making it through the Senate), the main miscellaneous expenses deduction is no longer.

Tax Reform Individual Tax Rate Schedule

Gambling Deductions Tax Reform 2019

From scratch-off lottery tickets to casino slot machines, the opportunities for your clients to lay down a wager are endless. According to the latest statistics, gambling revenue tops $158 billion each year and is expected to rise much higher with the legalization of sports betting.

While winning big may be a long shot, the odds are good that the IRS will expect its share. Here’s a rundown of the current tax law rules for gambling winners … and losers.

Winners

Gambling winnings — whether from a church bingo game or a mega-million lottery ticket — are fully taxable under federal tax law. Gambling income includes cash winnings and the fair market value of prizes, such as cash and tips.

Clearly, some gambling winnings may slip under the IRS’s radar — a $50 prize from a scratch off lottery ticket isn’t likely to be pursued by the IRS or even remembered by your client at tax time. However, more significant winnings are required to be reported to the IRS by the payer.

Under current rules, payers must report the following on Form W-2G, Certain Gambling Winnings:

• $1,200 or more in gambling winnings (not reduced by the wager) from bingo or slot machines.
• $1,500 or more in winnings (reduced by the wager) from Keno.
• More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament.
• $600 or more in gambling winnings (except winnings from bingo, keno, slot machines and poker tournaments) if the payout is at least 300 times the amount of the wager.
• Any other gambling winnings subject to federal income tax withholding.

In addition, gambling winnings from sweepstakes, wagering pools and lotteries are generally subject to regular income tax withholding of 24 percent if the winnings (minus the wager) are more than $5,000. In the case of winners from horse races, dog races, jai alai or certain other wagering transactions, withholding is required if the winnings are more than $5,000 and are at least 300 times the amount wagered. Withholding is not required for winnings from bingo, keno or slot machines, or for winnings of $5,000 or less. However, backup withholding may be required if the winner does not furnish a correct taxpayer identification number.

Losers

Under longstanding rules, casual gamblers can deduct gambling losses — but only to the extent of gambling winnings. What’s more, gambling losses are deductible only if a client itemizes deductions, and only if the client can substantiate the amount of the losses. In a recent case, the U.S. Tax Court denied a deduction for estimated losses claimed by husband and wife poker players because they didn’t provide evidence, such as a personal log of winnings and losses, to back up their claim. The couple explained that they tried to keep a daily record of their poker winnings and losses, but gave up the practice because it was “bad for your psyche” [Pham v. Comm., T.C. Summary Opinion 2016-73].

New law impact: For 2018 through 2025, the Tax Cuts and Jobs Act eliminates miscellaneous itemized deductions that were previously deductible subject to the 2-percent-of-adjusted-gross-income floor. However, that law change does not apply to gambling losses, which have been deductible – and will continue to be deductible – up to the amount of gambling income.

On the other hand, another new law change may impact loss deductions for casual gamblers. The new law significantly raises the standard deduction amounts for all filers, thus eliminating the advantage of itemizing for many taxpayers. In addition, many gamblers will not be able to offset their gambling losses against gambling winnings.

Gambling professionals

Professional gamblers report their winnings and deduct their losses above-the-line on Schedule C, Profit or Loss From Business. Thus, unlike casual gamblers, gambling pros can offset winnings with gambling losses even if they do not itemize deductions. Moreover, in a 2011 decision, the Tax Court held that the limitation of gambling loss deductions to gambling gains did not apply to non-wagering expenses of a gambling trade or business, such as travel expenses and admissions fees to a gambling venue. Consequently, those expenses could result in a net loss from gambling [Mayo v. Comm. 136 T.C. 81].

New law impact: The IRS acquiesced in the Tax Court decision, but Congress was apparently unhappy with the result. Effective for tax years beginning after 2017 and before 2026, tax reform provides that the gambling loss limitation applies not only to gambling wagers, but also to any deduction incurred in carrying on a wagering transaction [IRC §165(d)].

Nonetheless, the odds are that gambling pros will still have better luck than casual gamblers when it comes to tax write-offs. Despite the new law changes, losses up to the amount of gambling income remain deductible by professional gamblers, whether they itemize deductions or claim the increased standard deduction.