Do you enjoy gambling? Many people find it pleasant and relaxing to go to a casino and spend time at the slot machines or tables. One big problem we see as accountants is that most people don’t understand how earnings affect their tax return. Here are a couple of examples.
About 25 years ago a good friend called me and told me that her elderly parents had gone to Wendover, NV and won $ 50,000 playing a quarter slot machine. They lived on their Social Security and had not been required to file a tax return in several years. They wanted to use the money to buy a house, I could do that 25 years ago, but they were afraid of how much taxes they would have to pay. It turned out that they were able to pay the tax and buy a house, but due to the additional income, they had to pay taxes on their social security income, which they normally would not have had to do.
Another couple I know lived in a city with several casinos. One of his last moments was going to the casino after work. In the course of a year, they had made $ 250,000. However, they had actually spent more than their earnings. They both had good jobs and only one clerk. When we calculated their taxes, they owed a lot of money. They couldn’t understand why they owed so much when they spent more than they earned.
It was not an accounting error; Gambling winnings and expenses are taxed differently than other income and expenses. Let me explain. Your earnings are included in your adjusted gross income, but what you spend is deducted on a Schedule A. Now, if your adjusted gross UFA income is too high, the IRS places limits on what you can deduct on your Schedule A and elsewhere, including medical expenses. expenses, college tuition credits, child tax credits, exemptions, and employee business expenses. These deductions are limited before your gambling losses are deducted. This means that even if your gambling winnings are not enough, you will lose valuable tax deductions, which will cost you even more money.