Gambling with your tax liability – A message to retirees

luck-839037_1280Gambling is always risky. The house usually wins, but if you are a person receiving social security who gambles on a regular basis, you are even more certain to lose.

Larger winnings, amounts over $600 is the lowest threshold, you will be required to complete forms to provide your name, address and social security number so that a W-2G can be issued to for the amount of the winnings.

At the end of the year, the winnings are reported as income on your return. No problem, the losses equal or exceeded the winnings, so you think there are no income tax implications. That would be a mistake.

The earnings increase your Adjusted Gross Income, or income from all sources. The winnings could result in an increase in the social security benefits you received being subject to income tax. So that $10,000 of reported winnings, while not the amount you took home, could make $8,500 of your social security benefits taxable that would be tax free without the gambling winnings.

The second possible income tax consequence could come when you deduct your gambling losses as an itemized deduction. The standard deduction for a married filing joint couple in 2015 is $15,100. When you itemize your deductions, it is only the excess over this figure that actually decreases your taxable income. If you don’t have any itemized deductions at all (medical expenses, taxes, mortgage interest and charitable contributions among them) you still get to subtract the standard deduction against that adjusted Gross income mentioned earlier to determine your taxable income. Personal exemptions are subtracted as well, to be clear.

Ok, you have no mortgage, a small amount of charitable contributions and your taxes paid are usually only the real estate taxes on your home. The total is $6,000. You take the standard deduction of $15,100 because it exceeds the actual costs. Now let’s add in the gambling losses of $10,000 to offset the winnings we listed on the return. The total itemized deductions are $16,000, so you would claim the actual expenses. That is only an increase of $900 over the amount you would have received without the gambling losses. The total impact on your taxable income in this situation is an increase in your taxable income of the $10,000 of winnings, the additional taxable social security benefits of $8,500, less the additional $900 of deduction for your actual itemized deductions, net of $17,600. Even at 20% federal and state combined, that is $3,520.

So before you head to the horse track or casino, think again. Is it worth the tax hit, after all, the house and the IRS always win.

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