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THE HOUSE ALWAYS WINS

August 01, 2005

You don't need the IRS to tell you that gambling can be an expensive hobby. You don't them to make it more expensive, either. Just ask Jimmie Clemons.

Mr. Clemons, of Flat Rock, North Carolina, patronized Harrah's Cherokee Smokey Mountain Casino in 2001. The Casino gave him W-2G forms totalling $44,833 at year-end.

Mr. Clemons dutifully attached the W-2Gs to his 1040 for 2001, but he reported no gross income from gambling, once his losses were taken into account.

While the IRS conceded that Mr. Clemons had enough losses to wipe out his income, they took issue with Mr. Clemons return. The tax law requires you to report gambling winnings in gross income; losses are deducted as itemized deductions on Form 1040 Schedule A - "below the line." In other words, the losses reduce "taxable" income, but not "gross" income.

WHY IT MATTERS

So what, you ask? Well, Mr. Clemons also had $10,244 in Social Security benefits in 2001. Up to 85% of Social Secuirty benefits are taxable if adjusted gross income (AGI) gets high enough. For single taxpayers in 2001, the benefits start to become taxable when the taxpayers "base amount" (generally AGI plus Social Security benefits) reaches $32,000.

Without including gambling winnings in gross income, Mr. Clemons base amount would be $11,907; at this level, his Social Security benefits are tas free. With the winnings, the "base amount" is $56,430, and 85% of the Social Security benefit is taxable.

The Tax Court today ruled that the IRS treatment is correct. Even though the gambling losses wipe out his winnings "below the line," the inclusion of the winnings "above the line" in AGI makes Mr. Clemons' Social Security 85% taxable. The bottom line? $1,046 in additional federal income tax.

THE MORAL? The IRS and the house always come out ahead.

Citation: Clemons v. Commissioner, T.C. Summary Opinion 2005-109

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