How Zero Equals $380
Gambling income and losses have a unique structure in the Tax Code. Unlike most other types of income where you net expenses against income in reporting a net amount on page 1 of your form 1040, gambling winnings must be reported gross on page 1 and then you are allowed to deduct your gambling losses as an itemized deduction on Schedule A which flows to page 2 of form 1040.
I would hazard a guess that most farmers who gamble on a regular basis probably do not report this income and deduction correctly. You are required to report your gross income from each session of gambling. A session is essentially defined as being engaged in one type of gambling for an extended period of time. You accumulate all of the net winnings from this session. All of these net winnings are reported on page 1. You then are allowed to report all of your net losses on schedule A.
Let’s calculate how a farmer who regularly gambles and ends up the year with zero net gambling winnings can cost himself an extra $380 of income tax. We will take an extreme example. Suppose the farmer has rent income of exactly $10,000. He also goes to the local casino each day and on some days he has very good payouts and other days the casino ends up ahead. He keeps track of all of his net winnings and losses for the year and the total amount of winnings is exactly $250,000 and net losses are exactly $250,000 (he breaks even).
However, when preparing the tax return for him and his wife, we are required to report $260,000 of gross income less the $250,000 of gambling losses less some other itemized deductions and personal exemptions which brings his taxable income down to zero. However, he now has $10,000 of rent income subject to the 3.8% net investment income tax. He now owes $380 and that is how zero equals $380.
Gambling can both be hazardous to you at the casino and at tax time. If you enjoy gambling, please make sure to discuss this with your tax advisor to make sure you don’t owe any extra taxes.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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