Written by attorney Marty Davidoff

Tax Laws That Don't Make Sense - Part 1, Gambling Losses

The 1976 movie "Network" had one of its characters, a news anchorman, go off script and state "I'm as mad as hell and I'm not going to take this anymore" and urged America to open their windows and yell the phrase. Here's a link to that memorable scene: .

So, as an off-shoot to that, I am going to write some articles about tax laws that don't make sense. And, it is my hope that some of you become "mad as hell" about the inequities and let your friends in the media or your representatives in Congress know about the absurdity of these tax laws.

The system of taxation for amateur gamblers is unfair. In many cases, amateur gamblers will have losses exceeding their winnings and still pay taxes on the winnings! This unfair system has its roots in legislation enacted as early as 1944 and has remained substantially unchanged since that time. I say it is time to change the law in the interest of good public policy and fairness.

Our nation raises billions of dollars through gambling, whether through the taxation of private gambling establishments or the operation of government-owned lotteries. Yet, the federal taxation of gambling/wagering is simply not fair to all but professional gamblers.

Professional gamblers get to offset their losses, dollar for dollar, against their winnings and, accordingly, pay taxes only on their net profits. But, the bulk of Americans are not professional gamblers and for them, this simple system does not exist.

The tax law requires amateur gamblers to report their gambling income on line 21 ("Other Income") of their tax returns in arriving at Adjusted Gross Income (AGI). AGI is an important concept as it is a base to which formulas are applied to limit deductions for retirement plans, medical and miscellaneous itemized deductions, and phase-outs of the child tax credit and credits for adoption and education.

So, let's say Johnny wins $2,500 in the lottery today and throughout the remainder of the year Johnny loses $3,500 playing the lottery. What does the tax law require? The particular game of chance doesn't matter. The same scenario could take place with poker, black jack, or the slots.

In the example above, Johnny reports the $2,500 on line 21 in arriving at AGI. If Johnny takes the standard deduction ($6,100 for single, $12,200 for married in 2013), then no portion of the losses are deductible. If Johnny does itemize his deductions, then he may deduct the $2,500 as an itemized deduction. Such loss would be reported on Line 28 ("Other Miscellaneous Deductions") of his Schedule A. Johnny would not be permitted to deduct out-of-pocket expenses (i.e. books, travel, seminars) related to gambling even if his gambling winnings had exceeded his gambling losses.

Even if Johnny can take the full deduction of his losses as an itemized deduction, his level of AGI may reduce other credits and deductions through phase-outs based upon AGI and therefore his tax liability will be increased by his gambling activities even though he had no economic gain from such activities.

To complicate this further, how are winnings and losses determined? How do we segregate gambling transactions into the two buckets of wins and losses? Must one keep track of every spin of a slot machine or every hand of a blackjack session? Fortunately, the IRS has come up with a practical approach, at least for slot machine players, as to what could be an unbelievable record-keeping dilemma. That approach, set forth in a 2008 memorandum, allows taxpayers to determine their gains and losses at the point that he or she cashes in or "redeems" their tokens. So, if one starts with $100 and during a single session wins $1,000 and loses $1,100, thus walking away with nothing for the day, that person is deemed to have a loss of $100 as opposed to winnings of $1,000 and losses of $1,100. And, although this may provide some relief, imagine the weekend gambler who may have 50 or 100 separate sessions that must be each added to one of the two gambling buckets of wins and losses?

Hopefully by now I have made my point. Are you with me? If so, let the media know and contact your representative in Congress! Ask them simply to allow amateur gamblers to offset their losses against their winnings. Many states already do this! As you advocate for this change, anticipate the standard Congressional defense. "How do we pay for this change?" Well at this time, if you win $1,200 at a slot machine, you will get a form 1099-G. But, no 1099-G is provided to poker tournament winners unless they win over $5,000 in a single session. Simply reducing the threshold for reporting poker tournament winnings would likely make up a substantial portion of the cost of reasonable reform. In addition, there is no 1099-G for those playing at the non-tournament poker tables. Congress could require that chips in non-tournament poker rooms be easily tracked. If you buy in for $300 and leave with $3,000, that would become a reportable transaction of $2,700 of winnings.

It is now time to simplify and reform the reporting of gambling income and losses for amateur gamblers!

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