Home > Gambling Tax Basics, IRS > Tax Implications for Recreational Gamblers

Tax Implications for Recreational Gamblers

[Note:  I just realized my blog commenters are required to submit an e-mail address.  Nonsense.  ‘Tis no longer.  Now, I simply must approve your comments before they appear.  As long as it isn’t spam or obviously inappropriate, we’re cool.]

Recently, I have been preoccupied with state tax issues, and rightfully so.  After all, we are anxiously awaiting New Jersey Governor Chris Cristie to sign into law legalized intrastate internet gaming.  At that time, I expect us to have a much clearer picture of the law’s impact on the online poker community.  In the meantime, let’s jump back to the federal side.

A quick refresher:

“Professional” gamblers report gambling winnings and gambling losses on Schedule C, Profit or Loss From Business, of the Form 1040.  The resulting net winnings amount, if any, is reported on line 12 of the 1040 as business income.  Recreational” gamblers report gambling winnings on line 21 of the 1040, and report gambling losses, up to the extent of gambling winnings, as itemized deductions on Schedule A of the 1040.

I covered the primary tax implications of “professional” gamblers during my discussions of the self-employment tax and travel and entertainment expenses.  Let’s turn to “recreational” gamblers.

Suppose you have a full-time job, and play online poker approximately twenty hours a week.  When you file your 2010 tax return, it’s likely you report as a recreational gambler.  As a diligent taxpayer does, you properly document all poker “sessions.”  Your results from 2010:

Total winnings =$42,354.00.  Report on line 21 of the 1040 as “Other Income.”

Total losses = $16,213.00.  Report as an itemized deduction on line 28 of Schedule A.

Why are these items listed separately, and not simply netted, like they are for professional gamblers?  Several reasons:

1.  Itemized Deductions v. Standard Deduction

On line 40 of the 2010 Form 1040, you report either itemized deductions or your standard deduction.  In general, your federal income tax will be less if you take the larger of the two.  To ascertain your itemized deductions, complete Schedule A.  The standard deduction is a predetermined amount based on your filing status.

Suppose the standard deduction is greater than your itemized deductions.  In that case, your gambling losses are considered part of your standard deduction, and you essentially lose out on the gambling losses.

2.  Adjusted Gross Income

Several tax items are tied to Adjusted Gross Income (AGI), which is listed on line 37 of the 1040.  Because recreational gambling winnings are included in AGI, but gambling losses are not, the AGI amount is higher, as compared to when net gambling winnings are included in the AGI (which is the case for professional gamblers).

An inflated AGI can further limit a taxpayer’s ability to take other deductions.  Medical expenses, an itemized deduction, can be deducted only to the extent they exceed 7.5% of the taxpayer’s AGI.  For example, if a taxpayer has an AGI of $100,000, medical expenses can be deducted only to the extent they exceed $7,500.   Another significant deduction tied to AGI are miscellaneous itemized deductions, which can only be deducted to the extent they exceed 2% of AGI.

3.  Alternative Minimum Tax

The Alternative Minimum Tax (AMT), if applicable, requires a taxpayer to pay more in tax than he would otherwise.  It was enacted to prevent taxpayers with high incomes to use so many deductions resulting in little or no tax.  Indeed, the U.S. Treasury expects more and more taxpayers to be subject to AMT over the next few years.

AMT is imposed on a taxpayer if the “tentative minimum tax” exceeds the regular tax, and the taxpayer then must file a Form 6251.  AMT is based on a different measure of income than regular federal income tax is.  This different measure is called “alternative minimum taxable income,” and includes, among other items, AGI.

In general, the greater a taxpayer’s AGI, the greater “alternative minimum taxable income” is, and accordingly, the greater is likelihood the dreaded AMT bites.   All else equal, a taxpayer has a lower AGI if reporting as “professional” gambler than if reporting as a “recreational” gambler.  Clearly, this result does not work in the favor of the “recreational” gambler.

Final note: Don’t conclude from this discussion that filing as a professional always generates a lower tax bill.  Professional gamblers, unlike recreational gamblers, are subject to a 15.3% tax on self-employment income up to $106,800 for the 2010 tax year (note: for the 2011 tax year only, the SE tax is 13.3%).  Furthermore, each taxpayer’s situation is different; whether you are a considered “professional” or “recreational” gambler under the Internal Revenue Code is a facts and circumstances determination.

Categories: Gambling Tax Basics, IRS Tags:
  1. January 25th, 2011 at 18:42 | #1

    If you are a bad poker player and had only losses for 2010, do you still need to fill out this form?

  2. January 25th, 2011 at 21:48 | #2

    Bob,

    I assume you are referring to the Form 6251 Alternative Minimum Tax — Individuals.

    Assuming for the 2010 tax year you have no income other than from poker, and that the total from all winning gambling “sessions” (some positive number) is less than the total from all losing gambling “sessions,” the answer to your question is no.

    A taxpayer uses Form 6251 to determine whether the AMT is greater than Tax computed on the Form 1040. Applying the assumed facts above, line 1 of the Form 6251 is 0. Thus, AMT is 0, so the AMT won’t bite.

    For some general assistance with using Form 6251, check out http://www.irs.gov/pub/irs-pdf/i6251.pdf.

  3. January 26th, 2011 at 20:32 | #3

    Thanks!
    Now do I need to fill out 1040 for just all losses?

  4. January 27th, 2011 at 09:47 | #4

    A taxpayer who finishes with an overall gambling loss in 2010 may or may not need to file the 1040:

    A) If required to file the FBAR, the taxpayer must file the 1040 (with a Schedule B);

    B) If a professional gambler, “ordinary and necessary” business expenses may be taken as a net operating loss; or

    C) The Earned Income Tax Credit may provide the taxpayer a refund.

  1. No trackbacks yet.

COMPENSATION DISCLAIMER: Please note that Taxes in the Back has financial relationships with some of the merchants mentioned here. Taxes in the Back may be compensated if consumers choose to utilize the links located throughout the content on this site and generate sales for the said merchant.