What you need to know about gambling and your taxes in 2021

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The 2021 federal tax return filing deadline is April 18 this year, and for gamblers this is an opportunity to be reminded of how the tax code treats their gambling activities. In general, this is not very friendly.

The bottom line is simple and rigorous. Typically, all gambling revenue – including real money online casino games – must eventually be reported on line 8 of the well-known Form 1040 (along with inclusion in Schedule 1).

It may come as a surprise to some that gambling income is reported as a gross number rather than a net result. This is in contrast to, for example, capital gains or losses realized on stock transactions reported on line 7 of Form 1040 (usually accompanied by an Appendix D).

In plain language and as an example, this means that if a taxpayer wins $500 on Monday playing slots at a casino and then loses $800 on Tuesday playing slots, the taxpayer must report the $500 win on their 1040 form online 8. The $800 loss would be reported on Plan A (single deductions) – but there are caveats.

The first should be familiar to taxpayers who gamble. Reported gambling losses cannot exceed gambling winnings, so in the example above the taxpayer would have an allowable deduction of only $500 for a net zero result (gambling eats up the excess $300 loss). But then there is another problem.

The taxpayer need only account for gambling losses when listing deductions in Schedule A. And as a result of the 2017 tax review, the standard deduction allowance was raised to a point where it no longer makes financial sense for the taxpayer, for the vast majority of taxpayers, to itemize their deductions.

For many taxpayers who gamble relatively modestly, this means they have no way of deducting any gambling losses. So the gaming “win” stands alone as income, even if all gambling activity was a net loss.

Incidentally, the standard deduction for married couples filing a joint return for the 2021 tax year is $25,100. For single and married individuals who file separate tax returns, the standard deduction is $12,550. For heads of household, the standard deduction is $18,800.

The impact of gross gaming income on Line 8 can be subtle but significant. For example, this amount will be carried forward on line 11 Adjusted Gross Income, which may affect a number of tax circumstances such as: B. how much of the taxpayer’s Social Security benefits are taxable.

Basic control rules for players

  • Taxpayers who gamble should remember that all gambling winnings must be reported as income, regardless of whether the operator issues documentation such as a W-2G or a Form 1099.
  • Unfortunately, players cannot “net” their wins and losses when reporting gambling earnings. Gambling revenue is typically reported on Schedule 1 and then transferred to Form 1040, line 8.
  • Gambling losses are accounted for in Appendix A, Individual Deductions, and taxpayers must itemize these in order to benefit from a gambling loss deduction. However, taxpayers must choose between individual deductions or the standard deduction.
  • If game losses are deducted, they must not exceed the amount of game winnings.
  • Win or lose, taxpayers should keep a diary of their gambling activities. You should note where, when, what games were played and how much was won or lost. Taxpayers should also keep all evidence of wagering activity, including losses.
  • State taxes can also be levied on gambling winnings, and rules vary from state to state. Players should familiarize themselves with their state’s tax policy regarding gambling income.

Other things to consider

The proliferation of gambling, both brick-and-mortar and online, has created complications for taxpayers that should be addressed by a tax expert, but there are some things taxpayers should be aware of.

As mentioned earlier, keeping a diary of gambling activity is part of your record keeping.

Remember that all gambling winnings are reportable even if a gambling operator does not issue papers, often a W-2G or a 1099-MISC or a 1099-K.

Speaking of W-2Gs, here are the cases where the Internal Revenue Service says a W-2G should be issued by the gaming operator:

  • 1. Winnings (not reduced by wagering) are $1,200 or more from a bingo game or slot machine;
  • 2. Winnings (reduced by stake) are $1,500 or more from a Keno game;
  • 3. Winnings (reduced by stake or buy-in) are more than $5,000 from a poker tournament;
  • 4. The winnings (excluding winnings from bingo, slots, keno and poker tournaments) reduced by the stake at the payer’s option are:
  • A. $600 or more and
  • B. at least 300 times the bet amount; or
  • 5. Winnings are subject to federal income tax deduction (either regular gambling deduction or substitute deduction).

What can irritate taxpayers who gamble is how gambling activities are treated as opposed to something like day-trading stocks. In the latter case, which also involves significant risk, the stock day trader receives net losses for gains without having to choose between single deductions and standard deductions.

unfairness to players

The injustice to taxpayers who gamble, particularly those who gamble at a modest level, was noted by the American Gaming Association, the trade group that represents the gaming industry, when the 2017 tax law was revised.

“Under such a higher standard deduction, small and medium-sized slot players may not be able to itemize their deductions, even with their gaming losses, and therefore may not be able to offset gaming wins reported as income against their full gaming losses,” the AGA said in a letter on Capitol Hill.

“For the sake of tax simplification, AGA strongly recommends that gaming players should be allowed to deduct gaming losses from gaming winnings to calculate their taxable net gaming income for Adjusted Gross Income reporting purposes without having to itemize their deductions. ”

Unfortunately for players, this recommendation was not accepted by Congress.

For years, the AGA has tried unsuccessfully to raise the threshold for issuance of W-2Gs from $1,200 to $5,000. However, in early March, the Congressional Gaming Caucus made efforts to raise the slot tax threshold to $5,000 with bipartisan legislation and also provide a mechanism for future increases based on inflation. The current slot tax threshold of $1,200 has not been adjusted for inflation since 1977, and instances of $1,200 W-2Gs have skyrocketed since then.

Don’t forget government taxes

Not only do players have to deal with federal taxes, but they also have to deal with state income tax obligations. Some states allow deductions for losses, others do not. Some states allow losses and gains to be offset, most do not.

Michigan, for example, recently changed its tax laws to allow for game loss deductions on winnings. Mississippi, on the other hand, has a 3% tax where the gaming establishment withholds a 3% “non-refundable” tax if a W-2G level jackpot is hit, regardless of whether the winner is a state resident.

Casino customers from outside the country are treated separately. In many cases, the United States has tax treaties with other countries that dictate how non-US gamblers are treated from a tax perspective. For example, gambling winnings are not taxed in the UK and the US tax treaty with the UK means no US taxes will be withheld from these gambling customers.

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