Tax law clarifies deductions allowed for gambling
Q: Did the new tax law change the amount that you can deduct from gambling? I heard that there was some change but I can’t find any detail about what they did.
The change was a minor one that affects only people who are in the trade or business of gambling. It was intended to change the result of a 2011 Tax Court decision.
The law says that gambling losses can be claimed only to offset gambling winnings. This is the old law and did not change. The confusion came from what was meant by gambling losses.
For most gamblers, the rule has been that gambling winnings are reported on the first page of the tax return (Form 1040) and losses, limited to that income, are reported as itemized deductions.
For professional gamblers (in the business of gambling), both winnings and losses are reported on the first page of the form, so there is no need to itemize deductions to claim losses.
But no one can claim net losses from gambling (the law actually calls this “wagering”). The Tax Court said that losses from wagering meant just that — only the losses were limited to income.
In the Tax Court case the professional gambler wanted to deduct travel expenses incurred to gamble. The IRS said that since his total deductions had already offset his income, no more deductions could be claimed.
The Tax Court said that non-wagering deductions, such as travel expenses, were not limited to the income from gambling. Including the travel expenses allowed a professional gambler to report a net loss from the gambling activity.
The new law clarifies that it is the total deductions from the gambling activity, including any nonwagering expenses, which are limited to the gambling income.
This change will affect very few gamblers. Only professional gamblers had any claim to business expenses such as travel. They can still claim travel, but only if there is net income left after subtracting the wagering losses from the gains.
Q: In one of your earlier columns you noted that the personal and dependency exemptions no longer apply after 2017. This is true. Your point seemed to be that families with many children were losers in the new tax law. I think you missed several important things in this analysis. First, the new law doubles the standard deduction. Second, the new law doubles the tax credit for children. Since a credit is a dollar-for-dollar reduction in tax, this is more valuable than the loss of the exemption. I think your assessment of the law as it relates to families was not very fair.
I agree with the objective (tax law facts) part of your comment. I don’t agree with the subjective (not fair) part because I don’t think I wrote to say the law hurt families. I did say that there were some very negative parts of the law in relation to families.
The end result is, as you may know, complicated. A family with four children loses $24,300 of exemptions. The standard deduction doubles but if the family had mortgage interest, property taxes, state income taxes, and charitable gifts they may not benefit (they itemize in either case).
Also, the family’s deductions for income taxes and property taxes may now be limited by the $10,000 annual cap. The expanded child credit will help. Not only does the amount double but the income range where the credit is lost is significantly higher.
This family may also benefit from a reduced exposure to the alternative minimum tax (AMT). The AMT never allowed them to claim personal and dependency exemptions so it is possible the family, if they paid AMT, didn’t really lose anything when the exemptions went away.
So the impact on a “family” cannot really be stated without specifying that family’s situation. The law has been analyzed across different situations and sometimes the family wins and sometimes it loses.
If I implied the law was bad for families that is not what I intended to say. What I would have intended to say is that the post-enactment sales job saying that it was good for families is a simplistic analysis.
I’d settle for an agreement that — it depends.