When it comes to gambling winnings and taxes, most people assume they can offset their earnings with their losses.
But over the next two minutes, Steve explains how even winning the big one can still put you in the hole.
A popular pastime for many retired people is a day trip to a local casino or several days in Vegas. Many people – not me, I happen to think it’s nuts, but other folks – consider gambling fun. And people do occasionally hit the big one.
But an article I read this past week convinced me that even if you win big – $500,000 big – you still lose. And this is especially true for retired persons.
Almost everyone assumes you can offset your gambling winnings with your losses. So, if you hit the big one, you can offset the gain with your losses. Well, it’s almost right.
If the assumption were 100% right, there wouldn’t be a problem. Most people have so many accumulated gambling losses, any big win would be offset by those losses, and taxes wouldn’t be a problem.
But that’s not how it really works!
Gambling winnings are listed on the top line of your tax return with other income and directly drive your MAGI (modified adjusted gross income). Losses are listed as itemized deductions. And deductions come after the MAGI is figured and do not reduce it.
The MAGI is what is used to calculate all our benefits, like…
- Whether your Social Security benefits are taxable
- The amount of your Part B and Part D premiums you pay
- Eligibility to contribute to a Roth IRA
- Phasing out of itemized deductions… that’s a new one
- And another new one… eligibility for funding to purchase the new healthcare coverage.
In the case that I read, a longtime gambler and retired person who finally hit the big one – $550,000 – had more than enough accumulated losses to offset it. But because of how the law is written and his increased income from the winnings, he had to pay an additional $2,760 per year for part B coverage and an additional $2,850 in unexpected taxes. All of this was unplanned for.
And he lost another $11,400 in itemized deductions because his income was so high for that tax year – $630,000 high.
So, after you add up all his losses, even when you add in the $550,000 he won, he still went even further in the hole.
I know it can be fun to play the slots. My better half loves them. But be careful what you wish for. The big one can be a curse, too.