Does Gambling Winnings Affect Tax Credits

Everyone likes to gamble, play the lottery or Bingo every once in a while. Even a recreational gambler, will come across that quirk in the tax law. What quirk you wonder? That glitch that can actually cause you to pay more for your health insurance if you have gambling winnings. Yes, even if the overall result from gambling for the year is actually a loss. How on earth can this be, you wonder?

Obamacare and the Tax Laws About Gambling

Thus, from my reading of the EITC statute, gambling winnings of professional gamblers IS considered “earned income,” but gambling winnings of recreational gamblers IS NOT considered “earned income.” The credit amount is determined by a formula. Gambling might be an enjoyable pastime for some and it might provide a nice adrenaline rush when you win, but your winnings are subject to federal income tax, and possibly to state taxes as well. The IRS requires that you report the money as income, although it does allow you to claim a deduction for at least some of your losses.

1. Dec 12, 2020 “Taxpayers can deduct gambling losses only up to the amount of their gambling winnings,” says Leddy, “and only if they itemize their deductions.” For example, if your gambling winnings totaled $5,000 in the tax year, but you lost $6,000, you can only deduct $5,000 of those losses.
2. Some states do require gambling winners to claim the gambling winnings in the state where they were won. Most states tax all income earned in their state, regardless of your residency.

Well, you know how tangled a web our tax laws are. You should note that adding Obamacare into the equation creates some interesting fallout, such as this oddity.

To understand how this happens, you have to understand how gambling winnings and losses are put on your tax return. Gambling proceeds and losses are generally not a net item on the tax return. Therefore, the total gambling winnings are part of your AGI for the year. Your losses are taken as an itemized deduction and limited to an amount not to exceed your reported winnings.

Reporting Gambling Winnings

So, whether or not you itemize your deductions and deduct your gambling losses, the full amount of the gambling winnings is part of AGI. And, your AGI is included in your household income, which is used to determine the amount of premium tax credit (PTC) to which you are entitled. PTC is the subsidy the government provides to help pay for your insurance when you purchase it through the government insurance Marketplace. The higher your income, the lower your Premium Tax Credit, and the lower the PTC, the higher your insurance premiums.

How You Gamble Matters Too!

Did your gambling winnings exceed certain thresholds based on the type of gambling you did and the amount you won? Did you win or lose at the casino, poker palace or racetrack? Well, that establishment is required to send you and the IRS a Form W-2G that shows the winnings. You can be sure the IRS will be aware of your gambling income. Even if your losses for the year exceed your winnings, or should you not receive a W-2G form, the IRS expects you to report your winnings. The burden is yours to report it. This will increase your AGI and, likely, your Marketplace-purchased insurance premiums also.

What if I win money on a Game Show?

The same requirement applies if you win on a game show. The winnings are included in your Adjusted Gross Income. Let’s say, you give the goods you won to charity. You deduct the contribution as an itemized deduction, your gross income will include the entire winnings.

How Does Gambling Affect My Medicare Premium?

This impacts very few individuals. However, those who are retired and on Medicare, are in the same boat. That being gambling can increase the cost of Medicare Part B and D premiums. An individual’s Medicare B and D premiums are based on the person’s AGI from two years prior. Thus, if you hit it big a couple of years back, you could see a rise in two of your monthly Medicare B premiums. Those being the Medicare B and a supplement for the Medicare D premiums (prescription drug coverage).

What If I Have a Low Income? Does it Help My Insurance Premiums?

Typically, the Medicare premium increase generally impacts higher-income peoples who can deal more easily with the increased costs. Do you have any questions about the lottery and how it, or other winnings and losses may affect your tax return and medical insurance costs? Feel free to give Alex Franch, BS EA at 781.849.7200 for assistance in planning your real-estate transactions. Worthtax has locations in Quincy, Weymouth and Dedham.

Sources and Resources

An example of a popular question during tax season:

“I became a professional poker player in June 2010. Prior to then, I was a full-time college student and earned no income. Since June, my net gambling winnings are small in amount. Do I still need to file a tax return?”

Does Gambling Winnings Affect Tax Credits Filing

The answer: Probably.

There are many reasons why the answer is likely yes. One is because if income from self-employment for the year exceeds $400, the taxpayer must file. Another reason to file is the possible availability of the Earned Income Tax Credit (EITC). The EITC is available for some low income individuals, and may generate a refund, which is additional money in the taxpayer’s pocket.

Does Gambling Winnings Affect Tax Credits Due

To be eligible for the credit, the taxpayer must have:

• “earned income” and “adjusted gross income” less than a certain amount;
• a valid Social Security Number;
• filing status other than married filing separately;
• US citizenship or be a US resident alien;
• no foreign income;
• investment income less than a certain amount.

Gambling Winnings New Tax Law

Regarding the “earned income” and “adjusted gross income” amounts, this IRS article provides a summary. For single taxpayers with no qualifying children, for example, earned income and AGI must both be less than $13,460 to be eligible for the credit for the 2010 tax year.

“Earned income” includes wages, salaries, tips, and other employee compensation, plus the amount of the taxpayer’s net earnings from self-employment. Thus, from my reading of the EITC statute, gambling winnings of professional gamblers IS considered “earned income,” but gambling winnings of recreational gamblers IS NOT considered “earned income.”

The credit amount is determined by a formula. If you believe you may qualify for the EITC for the 2010 tax year, be sure to read this IRS publication for further assistance.