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Taxpayers Who Elected Standard Deduction Can't Deduct Gambling Losses

(Parker Tax Publishing August 2017)

The Tax Court held that a couple was taxable on gambling winnings shown on their Form W-2G and, because the couple could not substantiate how much was spent in producing the winnings, no reduction was allowed. The court also found that the couple's election to take the standard deduction precluded them from taking an itemized deduction for their gambling losses. Viso v. Comm'r, T.C. Memo. 2017-154.

During 2013, William Viso engaged in a variety of recreational gambling activities: he bet on college and professional sports, played slot machines, and bought lottery tickets. That year, he won $5,060 on slot machines at three different casinos. The gambling winnings were reported on Forms W-2G, Certain Gambling Winnings. That same year, Viso and his wife sustained approximately $7,000 in gambling losses.

On their joint Form 1040, the Visos did not report any gambling winnings or losses for the 2013 tax year. They claimed a standard deduction of $12,200. The IRS assessed a tax deficiency after including the $5,060 of gambling winnings in the couple's 2013 income.

The Visos did not challenge the accuracy of the gross gambling winnings included in their income; instead they argued that those amounts should be reduced by the amounts of bets they placed to produce their winnings. Although the couple introduced evidence of losses at another casino (in addition to lottery tickets and sporting bets), they produced no evidence as to how much William bet to produce the winnings reflected on the Forms W-2G.

For tax purposes, gambling losses are treated in one of two ways. Taxpayers engaged in the trade or business of gambling may deduct their gambling losses against their gambling winnings "above the line" as a trade or business expense in arriving at adjusted gross income. In the case of taxpayers not engaged in the trade or business of gambling, gambling losses are allowable as an itemized deduction, but only to the extent of gambling winnings.

The Tax Court held that the couple's election to take the standard deduction precluded them from taking an itemized deduction for their gambling losses. In addition, because they could not substantiate how much was spent in producing the winnings reflected on Forms W-2G, no reduction was allowed. In reaching its conclusion, the court cited Torpie v. Comm'r, T.C. Memo. 2000-168, which held that, in order to claim any Schedule A itemized deductions, a taxpayer must forgo the standard deduction.

The Tax Court noted that the couple's standard deduction of $12,200 exceeded their potential itemized deduction for gambling losses of $5,060. Thus, the court said, the couple's election to take the standard deduction resulted in a larger deduction than if they had taken an itemized deduction for their gambling losses. Since the couple elected to take the standard deduction, the court held they could not take an itemized deduction for their gambling losses to offset their gambling winnings.

For a discussion of itemizing deductions versus taking the standard deduction, see Parker Tax ¶82,125.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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