The gambling loss tax deduction likely won't help the country's newest multimillionaire trim his or her 2018 tax bill. The write-off, however, still will help winners of smaller amounts. Professional gamblers, though, aren't so lucky. They'll see a limitation on how they offset their taxable winnings under the Tax Cuts and Jobs Act changes.
I've been touching base with my Florida friends and former neighbors and none of them won — or is admitting to winning! — last night's Mega Millions drawing.
But some lucky Sunshine State resident is $450 million (more likely $281 million lump sum) richer today.
Actually, that $281 million will be closer to $211 million per USAMega.com calculations, because federal taxes will immediately be withheld from the jackpot.
That $211 million is still big enough to earn this week's By the Numbers honor.
And the Florida winner doesn't have to worry about state income taxes, since his or her state is one of the seven that doesn't have any type of income tax. In case you're thinking of moving, you can get that tax advantage by joining me here in my native Texas, my former Florida home, or in Alaska, Nevada, South Dakota, Washington or Wyoming.
Take your winning time: I hope the new lottery millionaire, who bought the winning ticket at a 7-Eleven in Port Richey, Florida, does take his or her time in coming forward.
There are several things anyone who suddenly comes into great wealth needs to do, both in connection with their improved financial situation and associated taxes. In an earlier post, I suggested five immediate tasks for big lottery winners.
Using losses to reduce winnings: One of those tips was to tally your gambling losses. The tax code allows you to claim as an itemized deduction all your betting losses throughout the tax year against your winnings.
In this latest instance, that's not much help. Unless the winner goes totally overboard the rest of this year in buying other, losing lottery tickets or is a compulsive (and bad) gambler, the new Mega Millions millionaire isn't going to make much of a dent in the taxable amount of his or her jackpot.
But for casual gamblers who occasionally drop a few dollars on lottery tickets or other games of chance, our relatively meager winnings might be offset by our larger gambling losses.
And yes, I'm in that group. No judging. No lectures. I know lottery games are not a credible financial plan. That's why I have a variety of tax-advantaged retirement accounts, as well as a general emergency savings account.
But it's fun to dream with games of chance reach astronomical levels. The most I've ever won was $40 on a Maryland lottery ticket when we lived there. My latest Mega Millions ticket netted me $4. What I paid for those meager winning was offset by the $10 ticket that had a few winning numbers.
And yes, as the photo below shows, I have my fingers crossed for tonight's, Jan. 6, even larger Powerball drawing.
All those tickets behind tonight's slip are testament to my foolishness. They are all like the one annotated LOSER SAD. They didn't return a dime when I bought them last year. But I kept them in case my numbers came up before 2017 ended. No such luck.
The good news is that the ticket for tonight's Powerball drawing will help me offset possible winnings I'll get this year. Yes, I have no illusions. I know I've probably wasted $10 bucks to start 2018.
UPDATE, Jan 7: I was right, dang it! One winning Powerball ticket for that lottery's $559 million jackpot was sold in New Hampshire.
Still deductible, with some limits, this year: Uncle Sam will keep helping me reduce any possible winnings.
While some itemized deductions were eliminated in the Tax Cuts and Jobs Act that became law on Jan. 1, the gambling loss write-off remains in the Internal Revenue Code.
That means for most of us lottery dreamers, nothing changes tax-wise. We will still add up our (few) winnings and subtract our (more) losses.
If we have more winnings than losses, that positive number is taxable income.
But if, as is usually the case, we have more losses than winnings, we can zero out our winnings so that we don't owe any tax on them.
We can't, however, use those excess gambling losses to further reduce our other taxable earnings. More losses than winnings are just part of the price of playing games of chance.
Pro gambler deductions narrowed: Folks who make their livings wagering, however, will see a change, starting this year and through 2025 (that's when the individual tax changes will expire unless Congress decides to keep them).
Under the new tax law, how non-wagering "expenses incurred in carrying out wagering transactions" count as part of gambling losses is revised.
Previously, Tax Court ruling let professional gamblers count business expenses related to gambling, such as travel costs to casinos and betting fees, toward their deductions to reduce their taxable winnings. These expenses were deemed deductible business expenses and were not subject to the rule limiting gambling losses to gambling gains.
However, the Tax Cuts and Jobs Act says the limitation on wagering losses applies to all deductions for expenses incurred in carrying out wagering transactions, not just gambling losses.
That means individuals engaged in the trade or business of gambling now must add those non-wagering expenses to their total losses before comparing that amount to their total taxable winnings for the purpose of making the overall deduction calculation.
And, just as is the case for all us casual bettors, those losses, gambling and non-wagering alike, are limited to the extent of gambling winnings.
That's lucky for the U.S. Treasury. The modification is estimated to increase federal revenue by $0.1 billion over the next 10 years.
You also might find these items of interest:
- Don't get into lottery tax trouble
- Lotteries aren't budget bonanzas for states
- Fantasy sports: Gambling or just good, clean online fun?
Kay Bell
thanks for the elaboration. I will clarify that. Basically, I was trying to say that the new law clarifies the term “losses from wagering transactions” and is intended, according to the conference report, to spell out that the limitation of losses from wagering transactions applies not only to the actual costs of wagers
Russell Fox, E.A.
I believe you are wrong about the impact of the new Section 11050 on professional gamblers. My read is that professional gamblers will no longer be able to have a Net Operating Loss based on business expenses; however, they will still be allowed to deduct business expenses as long as they are necessary and ordinary and do not cause a Net Operating Loss.
IRC 165(d) reads: Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. The new Section 11050 adds to IRC 165(d), “For purposes of the preceding sentence … the term ‘losses from wagering transactions’ includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.” There is no prohibition of necessary and ordinary business expenses for professional gamblers.
This is made clear in the conference committee’s analysis where they note, “The provision is intended to clarify that the limitation on losses from wagering transactions applies not only to the actual cost of wagers incurred by an individual, but to other expenses incurred by the individual in connection with the conduct of that individual’s gambling activity.” The footnote (#176) shows that the goal of this provision is to override “Mayo v Commissioner,” a Tax Court case that allowed professional gamblers to have a Net Operating Loss based on business expenses.
Gambling is my primary practice area.
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