Questions Around Casual Gambling, Sports Betting, and Taxation
With sports betting legal or becoming legal in more states across the country, including here in New England, many casual gamblers with significant winnings and losses are unsure how it will affect them at tax time. This is made even more confusing by a troubling amount of misinformation online regarding the 1099 reporting threshold and what that threshold actually means.
In this two-part series, we will address how casual gambling winnings and losses are treated federally and cover some of the specific complexities for clients living in New England. We’ll also take a look at the Session Method and whether it’s the right strategy for the casual gambler.
Part 1: Federal Tax Implications for Casual Gamblers
Misinformation is being spread on the internet that the first $600 or $1,200 of gambling income is not taxable because it’s below the threshold. This isn’t true. According to IRS Topic No 419, “You must report all gambling winnings on Form 1040 or Form 1040-SR, including winnings that aren’t reported on a Form W-2 G.”
The $600 or $1,200 myth is for the casinos/sportsbooks requirement to issue W-2 Gs. Gambling winnings are reportable on a W-2 G from the venue of gambling (casino, sportsbook, etc.) to the taxpayer if:
- Winnings of $1,200 or more from bingo or slot machines
- $1,500 or more from a keno game (reduced by the wager)
- $5,000 or more from a poker tournament (reduced by wager or buy-in)
Otherwise, the threshold is $600 or more (reduced by the wager at the option of the payer) or if the winnings are at least 300 times the amount of the wager, or if the winnings are subject to federal income withholding tax. It’s safe to say, the W-2 G has no bearing on what a taxpayer needs to report in their individual tax return.
Gambling winnings go on 1040 Schedule 1, line 8(b). Gambling losses can only be deducted if you itemize your deductions, only to the extent of your winnings (you cannot deduct more in gambling losses than you earned in gambling income), and you must have kept records of your winnings and losses. Losses are deducted on Schedule A of Form 1040 in line 16 (Other itemized deductions). Generally, the W-2 G amount will go in Schedule 1 and any losses that can be substantiated by your records will be reported on Schedule A.
Implications
While it may be great news that losses can be deducted (assuming records were kept), the gambling winnings can have some unforeseen effects. Because line 11 Adjusted Gross Income (AGI) of 1040 doesn’t include itemized deductions, taxpayers that receive tax credits, such as the American Opportunity Tax Credit, Alternative Minimum Tax Credit, Child Tax Credit, or Lifetime Learning Credit; grants, such as PELL grants; or income-based programs, such as Medicare that are based on AGI, may no longer qualify for such programs or, in the case of Medicare, their premiums may increase.
In Part 2, we will look at State Tax Implications and the Session Method. For more information on what casual gamblers can expect regarding their federal taxes, contact Rob Gould-Wetmore at ARB.
