Gambling winnings/losses issue

[LMurray1]

I had a series of W-2Gs for gambling winnings that I input one at a time into Turbotax.  My gambling losses equaled my gambling winnings.  However, Turbotax showed an increased in my Federal and state income taxes due in spite of my gambling losses equal to my winnings.  If I take away one W-2G at a time, my Federal and state taxes decrease.  Why?  I thought if gambling losses equal or exceed gambling winnings, there is no impact on taxes due.

[JillS56]

Yes, you are correct, that if your gambling losses equal your winnings you do not pay taxes.   Except that in order to take the gambling loss you must be able to file a Schedule A (itemize) on your return.   Gambling losses are reported on Schedule A under Other Itemized Deductions Line 16.   To get the deduction for the gambling loss your itemized deductions much be more than the standard deduction.   

If you are not able to itemize, you are not able to get credit for your gambling loss.   Keep in mind that even though your losses most likely exceed your winnings, you can only claim the losses to the amount of your winnings.  Gambling losses cannot exceed the winnings.   

My guess is that if your tax obligation increases with each W-2G is because you are not able to deduct your losses.   

[LMurray1]

Jill,

Thanks for your response.  I am still struggling with this problem.  My gambling W2G winnings (and losses) far exceed the standard deduction, so my return is itemized.  My deductions before the losses are below the itemized threshold.  It appears I am only getting a partial deduction for the losses.  If I input fake deductions to reach the standard deduction threshold, I still do not get full credit for my gambling losses vs my winnings.  I get all kinds of different results from Turbotax depending on my input for gambling winnings and losses when I have made sure my other itemized deductions are over the threshold.  Really seems like a software bug, but maybe something else? 

[Opus 17]

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@LMurray1 wrote:

Jill,

Thanks for your response.  I am still struggling with this problem.  My gambling W2G winnings (and losses) far exceed the standard deduction, so my return is itemized.  My deductions before the losses are below the itemized threshold.  It appears I am only getting a partial deduction for the losses.  If I input fake deductions to reach the standard deduction threshold, I still do not get full credit for my gambling losses vs my winnings.  I get all kinds of different results from Turbotax depending on my input for gambling winnings and losses when I have made sure my other itemized deductions are over the threshold.  Really seems like a software bug, but maybe something else? 

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If you are receiving social security, gambling winnings increase your adjusted gross income and may make more of your social security taxable.  Increasing your AGI can also decrease your eligibility for certain tax credits. 

[LMurray1]

Thanks for your response.  I am not receiving social security.  As I pointed out, if my itemized deductions are equal to the standard deduction, I am still unable to input any amount of gambling winnings/equal offsetting losses into Turbotax and maintain the same tax liability as before inputting any gambling info.  The Turbotax results keep changing depending on the total amount of winnings/equal offsetting losses input.  I don't understand why the winning and losses don't cancel each other out and leave the tax liability alone.  Feel free to run experiments with Turbotax to see if you get the same results.  I have tried it with multiple types of tax returns, and I still get unpredictable output from Turbotax.

[SweetieJean]

I suspect that it may be due to the way EIC is calculated (based on AGI, before Itemized deductions).  As your income goes up, EIC can actually go down.

[Opus 17]

@LMurray1

You would need to print a copy of your return without the gambling winnings and losses, then add them and print another copy, and compare them side by side.  There are several tax credits that are limited by income before taking deductions into account.  This includes the child tax credit and child care credit.

[LMurray1]

Thanks for your response.  So far I have created a number of different types of fake returns to experiment with adding gambling winnings/offsetting losses to see if I can create a single case where gambling winnings are 100% offset by equal losses.  No such luck.   I will be curious if anyone can create a return where they add gambling winnings/equal offsetting losses and end up with the same tax liability without any gambling entries.  I have no kids.  I am tempted to buy tax software from another company to see if the same thing happens, but that is an expensive and time consuming effort although well worth the money if I get different results from Turbotax.

[LMurray1]

Thanks for sharing your thoughts.  I do not qualify for EIC because both my AGI and investment income is significantly over the EIC limits.  For those following this ongoing thread, my gambling wins (which were offset by losses) is in the 5 digit range.

[Opus 17]

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@LMurray1 wrote:

Thanks for your response.  So far I have created a number of different types of fake returns to experiment with adding gambling winnings/offsetting losses to see if I can create a single case where gambling winnings are 100% offset by equal losses.  No such luck.   I will be curious if anyone can create a return where they add gambling winnings/equal offsetting losses and end up with the same tax liability without any gambling entries.  I have no kids.  I am tempted to buy tax software from another company to see if the same thing happens, but that is an expensive and time consuming effort although well worth the money if I get different results from Turbotax.

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It's not a matter of creating "multiple" fake returns.  You just need to print out your full tax return with and without the gambling and compare them side by side.

To be specific:

Gambling income is reported on schedule 1 line 8b.  The total of your other income from schedule 1 is added to form 1040 line 8. Your adjusted gross income is form 1040 line 11.  When you add the gambling income, does line 11 change by more than the amount of the gambling income?  If so, then the gambling income is making other income taxable (possibly capital gains, or social security benefits, or other items on schedule 1.  Just look and see if anything changes that you don't understand.

Then, your deductions are reported on schedule A and copied to form 1040 on line 12a.  When you enter your gambling losses, does your schedule A amount (line 12a) change by an equal amount, or less?  If it changes by less, look at schedule A and see what is going on.  (If your AGI is more than $300,000, there is a reduction of itemized deductions, but that was removed for 2018-2025 by tax reform.  It's possible Turbotax is still calculating that.  But you would see the result of that on your tax form by form 1040 line 12a not equal to the total of your schedule A deductions.

If your income goes up by the same amount as your deductions, then your taxable income (form 1040 line 15) will be the same with and without the gambling.  In that case, you need to look at the back page of form 1040 and see which credit is coming out smaller.  Then we can try and tell you why. 

[LMurray1]

Opus,

I very much appreciate your help.

I have followed the process you outlined, and I still do not have the problem resolved.  I have created 2 returns, 1 with no gambling (wins or losses), and 1 with identical gambling wins and losses (my tax return).

Line 11 on Form 1040 correctly corresponds to the gambling winnings.

Schedule A, line 12A exactly corresponds to the gambling losses.

Form 1040, line 15 is the same for both the gambling and non-gambling cases.

Here is where the differences appear.   Schedule 1040, lines 16 and 18 have a much higher number in the gambling case than the non-gambling case.  That traces back to differences on Schedule 2 line 12, which traces back to Form 8960.  On Form 8960, the difference appears in 2 places.  Line 9b, which is slightly higher for the nongambling case, and Line 13, which is dramatically higher for the gambling case.  In turn, Line 17 on this form is significantly higher for the gambling case.

The key appears to be Line 13 on Form 8960.  For that Form, no more tracing back - Turbotax simply says "see instructions."

Something has been created that ends up not canceling out gambling wins and losses.  Is this a software issue?

[Opus 17]

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@LMurray1 wrote:

Here is where the differences appear.   Schedule 1040, lines 16 and 18 have a much higher number in the gambling case than the non-gambling case.  That traces back to differences on Schedule 2 line 12, which traces back to Form 8960.  On Form 8960, the difference appears in 2 places.  Line 9b, which is slightly higher for the nongambling case, and Line 13, which is dramatically higher for the gambling case.  In turn, Line 17 on this form is significantly higher for the gambling case.

The key appears to be Line 13 on Form 8960.  For that Form, no more tracing back - Turbotax simply says "see instructions."

Something has been created that ends up not canceling out gambling wins and losses.  Is this a software issue?

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So you're getting stung by the net investment tax.  Here are the instructions for form 8960.

https://www.irs.gov/pub/irs-pdf/i8960.pdf

Basically, the net investment tax was created to pay for the Affordable Care Act ("Obamacare") by imposing an extra tax on investment income earned by "rich" people.   Looking only at form 8960 lines 12-17:

Line 12 is your net investment income.

Line 13-15 compares your modified adjusted gross income (MAGI) with the income limit for the tax, which is $250,000 for MFJ, $125,000 for MFS and $200,000 for single.

Line 16 is your investment income actually subject to the NIT.

If your MAGI is less than the threshold that applies to you, then line 16 will be zero and your investments won't be taxed.  If your MAGI is more than your threshold, then your investments start to get taxed.  The more your income goes up, the more of your investments get taxed.

Your investment income subject to the tax (line 16) will never be more than your total investment income (line 12), but the higher your MAGI, the bigger line 16 will get, until it maxes out at being equal to line 12.

MAGI is computed before itemized deductions (its your gross income before deductions and not your taxable income after deductions) so the gambling winnings are increasing your MAGI (line 13) and therefore increasing the amount of your investment income subject to the NIT (line 16).

I suspect this situation does not affect too many people, because it requires a combination of circumstances (gross income in a certain range, gambling income in a certain range, and substantial investment income) but your tax is being calculated correctly.    Check the instructions and do the math on lines 12-17 yourself.

(The line 9b adjustment is explained on one of the worksheets in the instructions, as well.)

Hope this helps.

[LMurray1]

Opus,

Thanks for that additional information.  Sadly, I'm sure you are correct but I will go ahead and work through the instructions.  So much for the concept of "gambling losses offset gambling winnings", at least in my case.  Time for a new hobby.

I appreciate the time and effort you have put on this.  

Best regards

[Greghball]

I had the same experience. My Minnesota State Taxes increased by $1,000 compared to the level before I entered the W-2Gs. In other words, after I noted the beginning MN Tax, entered the W-2Gs, then applied my losses against the winnings. my MN Tax was the original figure + $1,000. What gives?? My Federal Tax only increased by $15; I can live with that!

[RaifH]

Claiming gambling losses requires you to itemize your deductions, both federally and in Minnesota. In Minnesota, your itemized deductions start to be limited if your adjusted gross income is over $199,850, or $99,925 if married filing separately. In that case, your itemized deductions start to be phased out. If you are using TurboTax desktop or pre-pay for TurboTax online, you can look at Minnesota Schedule M1SA to see the amount that is being phased out. If you are using TurboTax Online and you have not yet paid, you can see your total deductible Minnesota itemized deductions, as well as your AGI:

1. Open or continue your return.
2. Select Tax Tools in the left menu (if you don't see this, select the menu icon in the upper-left corner).
3. With the Tax Tools menu open, you can then view your 1040 form: Select Tools. Next, select View Tax Summary in the pop-up, then MN Tax Summary in the left menu
4. Your Adjusted gross income is on the first line. The itemized deductions, which includes your gambling losses is on the third line. If it is less than your reported gambling losses, it is because your AGI exceeds the threshold and your allowable itemized deductions have been reduced.