In our very long and complex tax code, tax deductions come in all shapes and sizes, and have a lot of sticky rules attached to them. For example, business expenses must be ordinary (common and accepted in an industry) and necessary ...

• Gambling Deduction Tax Reform
• Gambling Deductions Tax Reform 2020
• Gambling Loss Deduction Tax Reform
• Gambling Deductions Tax Reform Withheld

While you may be able to deduct your gambling losses, gambling winnings are not directly offset by gambling losses in your tax return. You must be able to itemize deductions on Schedule A to deduct gambling losses and can only deduct an amount up to the amount of your gambling winnings. The Act provides that the limitation on wagering losses is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings. The 2018 tax reform law didn't eliminate business expenses, such as the cost of travel to and staying at casinos while a professional plies his or her trade, but it did rescind a pro's previous ability to deduct those expenses if their total, combined with his or her losses, was less than zero compared to the wins.

In our very long and complex tax code, tax deductions come in all shapes and sizes, and have a lot of sticky rules attached to them. For example, business expenses must be ordinary (common and accepted in an industry) and necessary (helpful and appropriate for the trade or business) to be deductible. If your clients itemize deductions, they can deduct medical expenses paid for themselves, spouses and dependents to the extent they exceed 7.5% of adjusted gross income. Under the Tax Cuts and Jobs Act, you can no longer deduct miscellaneous employee business expenses subject to the 2% adjusted gross income threshold.

Review the following list of expenses to help your clients stay compliant and minimize their tax liability. Excerpts were taken from Publication 502, Medical and Dental Expenses, and Publication 529, Miscellaneous Deductions. Please refer to these publications for a more complete list of tax deductions.

Medical Expenses

Deductible

• Alcoholism Treatment: Amounts paid for inpatient treatment at a therapeutic center for alcohol addiction, including meals and lodging provided by the center during treatment.
• Fertility Enhancement: The cost of the following procedures to overcome an inability to have children:
• In vitro fertilization, including temporary storage of eggs or sperm.
• Surgery, including an operation to reverse prior surgery that prevented you from having children.
  
• Guide Dog and Service Animals: The cost of buying, training and maintaining a guide dog or other service animal to help a person who is visually impaired, hearing disabled or has another physical disability. Expenses include food, grooming and veterinary care to maintain the health of the animal so it can perform its duties.
  
• Stop Smoking Programs: However, you cannot include amounts paid for drugs that don’t require a prescription, such as nicotine gum or patches.

Not Deductible

• Weight Loss Programs: You’re not allowed to deduct the cost of a weight loss program if the purpose is the improvement of appearance, general health or sense of well-being. However, you can deduct the expenses if the weight loss treatment is for a specific disease diagnosed by a doctor (e.g. obesity, hypertension or heart disease).
• Nonprescription Drugs and Medicine (except for insulin): A prescribed drug requires a prescription by a doctor to be deductible.
• Health Club Dues: Includes amounts paid to improve your general health. or to relieve your physical or mental discomfort. and is not related to a medical condition.
• Cosmetic Surgery: Includes procedures directed at improving one’s appearance but does not meaningfully promote the proper function of the body or prevent or treat an illness or disease. Examples include face lifts, hair transplants, hair removal or liposuction. You can deduct cosmetic surgery if it is necessary to improve a deformity arising from a congenital abnormality, personal injury or disfiguring disease.
  

Miscellaneous Deductions

Deductible

• Gambling Losses to the Extent of Gambling Winnings: Gambling losses include wagers plus expenses incurred in connection with the conduct of a gambling activity, such as travel.
• Casualty and Theft Losses on Income-Producing Property: Investment property includes stocks, notes, bonds, gold, silver, vacant lots and works of art.
  
• Federal Estate Tax on Income in Respect of a Decedent: This is gross income the decedent would have received if the death didn’t happen and was not properly included on the decedent’s final tax return.
• Fines and Penalties: In general, fines and penalties paid to a government or specified non-government entity for the violation of any law are disallowed, except for the following situations:
• Amounts paid for restitution.
• Amounts paid to come into compliance with the law.
• Taxes due.
• Certain court orders where no government agency is a party.
• Home Office: You can take a home office deduction if you use part of your home regularly and exclusively for business purposes.
• Club Dues: The following organizations are not treated as clubs organized for business, pleasure, recreation or social purpose (unless one of the main purposes is for entertainment):
• Boards of trade
• Business leagues
• Chambers of commerce
• Civic or public service organizations
• Professional organizations
• Real estate boards
• Trade associations
  
• Losses from Ponzi-Type Investment Schemes: Deductible as theft losses from income-producing property.

Not Deductible

• Unreimbursed Employee Expenses are not Deductible, unless you fall into one of these categories:
• Armed Forces reservist
• Qualified performing artist
• Fee-basis state or local government official
• Employee with impairment-related work expenses
  
• Campaign Expenses: This applies to a candidate for any office and includes qualification and registration fees and legal fees.
  
• Commuting Expenses: The transportation cost going from your home to your main or regular place of work is not deductible. However, there is an exception is for Armed Forces reservists, qualified performing artists, fee-basis government officials and employees with impairment-related work expenses. They can deduct the additional cost of hauling tools, instruments, or other items in their car to and from work.
  
• Fines and Penalties:
• Amounts paid to settle your actual or potential liability for a fine or penalty (civil or criminal).
• Parking tickets and tax penalties.
• Restitution paid to come into compliance with the law (unless the amounts are specifically identified in the settlement agreement or court order).
• Reimbursement to the government for the cost of an investigation or litigation.
  
• Lobbying Expenses:
• Influence legislation.
• Participate or intervene in any political campaign for or against any candidate for public office.
• Attempt to influence the general public about elections and legislative affairs.
• Communicate directly with executive branch officials to try to influence official actions.
  
• Club Dues: This includes the membership in any club organized for business, pleasure, recreation or social purpose. Examples include athletic, luncheon, sporting, airline, hotel and country club.
• Political Contributions:

• Political contributions made to a political candidate, campaign committee or newsletter fund.
• Advertisements in convention bulletins and dinners and programs that benefit a political party or candidate.
  

Gambling Deduction Tax Reform

Enhance Your Trusted Advisor Role

Feel free to share this information with your clients and prospects to help grow your practice and bolster your role as a trusted advisor. Your clients will be delighted for every tax dollar saved!

Here in New Mexico, it’s nearly impossible to go on a road trip without passing at least one tribal casino. That meant that during my tax prep days, I saw a lot of Form W-2G, Certain Gambling Winnings. Those were all from casual gamblers, who are treated differently for tax purposes from professional gamblers.

Professional gamblers are dealt a better hand than casual gamblers

Casual gamblers – who make up the vast majority of gamblers – can deduct their losses from gambling on Schedule A of their tax returns, up to the amount of their winnings. Apparently, lady luck was watching out for gamblers when the Tax Cuts and Jobs Act was created; that tax break remains in place, unlike miscellaneous itemized deductions subject to the two percent threshold, which are suspended through 2025.

Professional gamblers report their results on Schedule C. In addition to the gambling losses that all gamblers can deduct, professional gamblers can also deduct business-type expenses. This includes things like travel expenses and educational materials. They pay self-employment tax on any net winnings.

But, in gambling, you win some, and you lose some. Prior to the 2017 tax reform, gamblers could deduct business-type expenses that exceeded their winnings to generate net operating losses. But, the TCJA amended Section 165(d) to clarify that total gambling expenses, including business-type expenses, are now limited to income from gambling.

Advisors should be aware that some states, including Connecticut, Illinois, Indiana, and Wisconsin, do not allow casual gamblers to deduct gambling losses as an itemized deduction. Professional gamblers are allowed to, but their returns may be subject to extra scrutiny.

Gambling Deductions Tax Reform 2020

How to get an edge as a professional gambler

To gauge whether your clients qualify as professional gamblers, you’ll have to measure their facts and circumstances against the factors in the 1987 Supreme Court Groetzinger case.

According to that case, “If one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.” This subset of the nine factors used to classify activities as hobbies or businesses contains the ones most relevant to gambling.

Poker player draws a losing hand

To see how these apply in real life, let’s look at the recent tax court case of James Zalesiak. As a college student, Zalesiak began playing poker. He had enough success that he began playing poker full time in 2009. In 2010, he took a year off from poker to “establish a different career.” By the end of that year, he began working as a construction manager, which remains his full-time job.

In 2011, he returned to poker, and spent nights and weekends playing. He made a small profit from poker in 2011 and again in 2015, the year the tax court was examining. On his 2015 return, he had poker winnings of $20,930, losses of $16,841, and business-type expenses of $2,970, resulting in net income of $1,119 from poker.

Gambling Loss Deduction Tax Reform

During 2015, his construction manager job kept him busy, so he wasn’t able to play at all for about five months, and only played poker about 75 days that year. A good chunk of that playing happened in December, when he took the month off, using accrued leave time. During that month, he combined travel to casinos with visits to friends and family, so that he “was able to get two birds with one stone.”

With a full-time job as a construction manager, Zalesiak clearly couldn’t play poker full time. As the judge noted, “simply spending all of one’s free time on an activity does not transform the activity into a trade or business, nor does it make the participant a professional.”

The judge did not deny that Zalesiak was playing poker with the good faith desire to win. However, he also took a good chunk of time that year off from playing poker, so he didn’t play with regularity. During 2015, 98.1 percent of Zalesiak’s income came from his job as a construction manager, so his poker playing clearly wasn’t producing income for a livelihood.

Gambling Deductions Tax Reform Withheld

Therefore, the judge ruled that Zalesiak was not a professional gambler, and could only deduct his gambling losses on Schedule A. However, since the IRS had initially denied even that deduction, he was able to cut his losses.

Understanding the differences between casual and professional gamblers will help you ensure that your gambling clients play their cards right on their tax returns!