The Wages of Sin
A New Jersey couple frequented Atlantic City, and enjoyed playing the slot machines. In 2004, they were "lucky" enough to win $208,420 in jackpots for which they received W-2Gs. The couple, though, didn't include that income on their tax return as they had lost overall while gambling in 2004 and they used simple logic to determine that overall losers don't have to include gambling income on their tax returns.
Unfortunately, that's not the case. The couple's return was examined (audited) and the IRS added the $208,420 as gambling income (and did allow an itemized deduction of the same amount). However, because their adjusted gross income (AGI) changed several deductions were disallowed or negatively impacted. They ended up having a tax deficiency of $4,190. They appealed to the U.S. Tax Court.
Unfortunately for the New Jersey couple, gambling income must be included as part of your income even if you're an overall loser for the year. As the Court noted,
The couple were not professional gamblers (they both had full-time employment) so the IRS was correct—the $208,420 must be included as income (though they do get an itemized deduction for their losses up to the amount of their wins, $208,420).
The IRS also attempted to impose a negligence penalty under §6662(a). The petitioners explained that they had been preparing their returns in this manner for years without any problems and that they felt that logically losers wouldn't have any income. Luckily, the Court saw the logic in their remarks (though the couple is incorrect on the law).
So the New Jersey couple will have to pay the $4,190 but do not have to pay an additional $838 for negligence. This case shows the unfairness of the US Tax Code toward gamblers—the couple lost and their taxes went up. The wages of sin, I suppose.
Case: Dawson v. Commissioner, T.C. Summary 2008-17
Unfortunately, that's not the case. The couple's return was examined (audited) and the IRS added the $208,420 as gambling income (and did allow an itemized deduction of the same amount). However, because their adjusted gross income (AGI) changed several deductions were disallowed or negatively impacted. They ended up having a tax deficiency of $4,190. They appealed to the U.S. Tax Court.
Unfortunately for the New Jersey couple, gambling income must be included as part of your income even if you're an overall loser for the year. As the Court noted,
"The jackpots that petitioners received constitute gambling income. A taxpayer in the trade or business of gambling may deduct wagering losses to the extent allowable in computing adjusted gross income. A taxpayer who was not in the trade or business of gambling may deduct wagering losses only to the extent allowable as an itemized deduction to compute taxable income."
The couple were not professional gamblers (they both had full-time employment) so the IRS was correct—the $208,420 must be included as income (though they do get an itemized deduction for their losses up to the amount of their wins, $208,420).
The IRS also attempted to impose a negligence penalty under §6662(a). The petitioners explained that they had been preparing their returns in this manner for years without any problems and that they felt that logically losers wouldn't have any income. Luckily, the Court saw the logic in their remarks (though the couple is incorrect on the law).
So the New Jersey couple will have to pay the $4,190 but do not have to pay an additional $838 for negligence. This case shows the unfairness of the US Tax Code toward gamblers—the couple lost and their taxes went up. The wages of sin, I suppose.
Case: Dawson v. Commissioner, T.C. Summary 2008-17