- Learn how to report your gambling winnings.
- Find out how to report gambling losses.
- Discover how your gambling winnings may affect your Social Security Income.
- Find out how your gambling winnings can affect your health care insurance premium subsidies.
- Learn how gambling income can affect your Medicare B & D Premiums.
- Find out how to deal with taxes if your online gambling accounts are with foreign companies.
Gambling is a recreational activity for many taxpayers, and as one might expect, the government takes a cut if you win and won’t allow you to claim a loss in excess of your winnings. In fact, there are far more tax issues related to gambling than you might expect. And these issues may impact your taxes in more ways than you might believe. Fiducial has a rundown on the many issues, the so-called “gotchas,” that can affect you.
Reporting gambling winnings
Taxpayers must report the full amount of their gambling winnings for the year as income on their 1040 returns. Gambling income includes, but is not limited to, winnings from lotteries, raffles, lotto tickets and scratchers, horse and dog races, and casinos. It also includes the fair market value of prizes such as cars, houses, trips, or other non-cash prizes. You must report the full amount of the winnings, not the net after subtracting losses.
The exception to the last statement is that the cost of the winning ticket or winning spin on a slot machine is deductible from the gross winnings. For example, if you put $1 into a slot machine and won $500, you would include $499 as the amount of your gross winnings, even if you’d previously spent $50 feeding the machine.
Frequently, taxpayers with winnings only expect to report those winnings included on Form W-2G. However, while that form is only issued for “Certain Gambling Winnings,” the tax code requires all winnings to be reported. All winnings from gambling activities must be included when computing the deductible gambling losses. This is generally always an issue in a gambling loss audit.
Since you can’t net your winnings and losses, the full amount of your winnings ends up in your adjusted gross income (AGI). The AGI is used to limit other tax benefits, as discussed later. So, the higher the AGI, the more your other tax benefits may be limited.
Reporting gambling losses
A taxpayer may deduct gambling losses suffered in the tax year as a miscellaneous itemized deduction (not subject to the 2% of AGI limitation). But you can only deduct them to the extent of that year's gambling gains.
If you don’t itemize your deductions, you can’t deduct your losses. Thus, individuals taking the standard deduction will end up paying taxes on all of their winnings, even if they had a net loss.
Social Security Income
For taxpayers receiving Social Security benefits, whether those benefits are taxable depends upon the taxpayer’s income (AGI) for the year. The taxation threshold for Social Security benefits is $32,000 for married taxpayers filing jointly, $0 for married taxpayers filing separately, and $25,000 for all other filing statuses. If the sum of your AGI (before including any SS income), interest income from municipal bonds, and one-half the amount of SS benefits received for the year exceeds the threshold amount, then 50–85% of the SS benefit is taxable.
If your gambling winnings push your AGI for the year over the threshold amount, your gambling winnings can cause up to 85% of your Social Security benefits to become taxable. This is true even if you had a net loss.
Health insurance subsidies
Lower income individuals who purchase their health insurance from a government marketplace receive a subsidy in the form of a tax credit. This credit helps pay the cost of their health insurance. Most people eligible for the tax credit use it to reduce their monthly health insurance premiums. That tax credit is based upon the AGIs of all members of the family. The higher the family income, the lower the subsidy becomes.
The addition of gambling income to your family’s income can result in significant reductions in the health insurance subsidy, requiring you to pay more for your family’s health insurance coverage for the year. Additionally, if your subsidy was based upon your estimated income for the year, if your premiums were reduced by applying the subsidy in advance, and if you subsequently had some gambling winnings, then you could get stuck with paying back some or all of the subsidy when you file your return for the year.
Medicare B & D Premiums
If you are covered by Medicare, the amount you are required to pay (generally withheld from your Social Security benefits) for Medicare B premiums is normally $144.60 per month and is based on your AGI two years prior. However, if that AGI was above $87,000 ($174,000 for married taxpayers filing jointly), the monthly premiums can increase to as much $491.60. If you also have prescription drug coverage through Medicare Part D, and if your AGI exceeds the $87,000/$174,000 threshold, your monthly surcharge for Part D coverage will range from $12.20 to $76.40 (2020 rates).
The addition of gambling winnings to your AGI can result in higher Medicare B & D premiums.
Online gambling accounts
If you have an online gambling account, there is a good chance that the account is with a foreign company. All U.S. persons with a financial interest or signature authority over foreign accounts with an aggregate balance of over $10,000 anytime during the prior calendar year must report those accounts to the Treasury. Reporting must happen by the April due date for filing individual tax returns. You do not want to face the draconian penalties associated with a failure to report this.
Regardless of whether you are a gambling winner or loser, if your online account was over $10,000, you will be required to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). We commonly refer to this as the FBAR. For non-willful violations, civil penalties up to $10,000 may be imposed. However, the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. The $10,000 and $100,000 penalty amounts are subject to adjustment for inflation. These penalty amounts after February 19, 2020, are $13,481 and $134,806, respectively.
The aforementioned are the most significant “gotchas.” Numerous other tax rules limit tax benefits based on AGI, as discussed in gotcha #1. These include medical deductions, certain casualty losses, child and dependent care credits, the Child Tax Credit, and the EITC, just to name a few. Have questions related to gambling and taxes? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations.
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