Today I would like to talk to you about Gambling Income and Losses as modified by the Tax Cut and Jobs Act of 2018. This is an area of the tax reform that is often overlooked, but one that I find particularly interesting because it kind of goes counterintuitive to some of the main tenets of the tax reform, whereby businesses and their owners get additional benefits.
Video Transcript - Taxes on Gambling Income
It's time to get down to the Brass Tacks. My name is Mel Sams and I'm the managing associate of Sams CPA. And today I'd like to talk to you about gambling income and losses as modified by the Tax Cut and Jobs Act of 2018. Now this was an area of the tax reform that's been often overlooked, but I find particularly interesting, because it goes counter-intuitive to some of the main tenets of the tax reform, whereby businesses and their owners get additional benefits. The effect on gambling has kind of gone the other way, and I'll explain what I mean by that.
Prior to 2018, typically if you were a recreational gambler, let's call it that, you go to the casino from time to time, you wager, lottery tickets, whatever, sports betting, which is now legal, becoming legal in the US per Supreme Court decision. But this recreational gambling, meaning that you did not do that for your primary revenue source. Recreational gamblers were able to deduct gambling losses if they itemized their deductions, to the extent of their gambling winnings. And they had to provide substantiation for those losses, meaning if you wagered $2,000 on a slot machine and won $1,500 back, you would receive a W-2 G in the amount of $1,500, but then you would be able to take $1,500 of gambling losses to offset. Now, that extra 500 would just disappear, it was a personal expense not deductible anywhere. But it was limited to the cost of the wager, the money you put in the slot machine, the money you paid for the lottery ticket, that initial wager.
And professional gamblers, to the contrary, before 2018, those people who met the very narrow definition of a professional gambler who gamble as a trade or business, they were able to deduct not only the cost of their wagers, but also their travel, meals, other indirect costs related to that gambling business. And they were able to take those deductions in excess of their income from gambling.
The Tax Cut and Jobs Act flipped that around. And it's interesting to note that now individuals who have gambling winnings, and I mean the recreational gamblers who have gambling winnings, they can still offset, if they itemize, they can still offset those winnings to the extent of their losses. But now they can claim their travel, they can claim their meals, and those indirect costs, lodging, those indirect costs that were paid in connection with the event in which they won that money. You fly to Las Vegas, you gamble, you win $5,000. Let's say you really lived it up, and the total cost of your trip was $6,000. You wagered $2,000.
Under the old rules, you'd have $5,000 of income and $2,000 of offset, netting you a $3,000 taxable income from gambling. But now, under the new law, you would have $5,000 of gambling income and $5,000 of gambling expenses, your $2,000 wagers plus your stay, lodging, travel, meals, those things. So big benefit for the recreational gamblers out there, and a big change, which again, in an environment where under the tax reform individuals were losing a lot of itemized deductions, they're now getting this one back in a big way, for those who are recreational gamblers.
Now, keep in mind, you have to itemize your deductions to take advantage of this, and the new standard deductions for married couples, single people, head of household, etc., have all essentially doubled. So before you get too excited about that, just make sure that you're still going to be able to itemize with the new higher thresholds.
Now, for you professional gamblers out there, the rules have unfortunately changed against your favor, going the opposite way. Under the new tax reform, you have your income from gambling, and you can offset that with the direct wagering costs, but you can no longer deduct all those ancillary costs to the point where you create a loss. You can break even at zero, but you cannot create a loss any more. And that's huge for all of the people out there who are professional gamblers, who earn a living from gambling. So talk to your CPA, figure out which one you are, recreational versus professional. Make that assessment, and then figure out what expenses you have to offset those gambling winnings so that you're not taxed unnecessarily on the profits that you have there.
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