Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

GAMBLERS - TAXING WITHOUT A NET

February 21, 2008

Recreational gamblers face a hidden tax. Gamblers aren't allowed to "net" their losses against their winnings. They have to include their winnings "above the line" in computing their adjusted gross income (AGI), while separeately deducting their losses "below the line" as itemized deductions on Schedule A.

In its infinite unwisdom, Congress disallows a number of tax benefits based on AGI. Just to name a few: itemized deductions are reduced as AGI increases, as are personal exemptions; the child tax credit is disallowed for high AGIs; passive loss rules get stricter for real estate owners with high AGIs. An avid gambler can run a lot of money through the slots in a year, running up a high AGI while (almost inevitably) losing money overall.

Russ Fox tells the story of a New Jersey couple who just learned this lesson. They netted their losses against their winnings. The IRS caught up with them, recomputed the return putting their winnings above the line and their losses on Schedule A. This increased their tax by over $4,000.

Fortunately for them, the Tax Court found their netting "logical," if wrong, and didn't impose penalties.

Cite: Dawson, T.C. Summary Opinion 2008-17.

      Bookmark: del.icio.us • Digg • reddit