An example of a popular question during tax season:
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.
Does Gambling Winnings Affect Tax Credits Limit
- In case you had any doubt: yes, the government charges income tax on all gambling winnings, including those from sports gambling.
- If gambling winnings do not meet the following thresholds set by the IRS for the respective type of gambling, it must be reported as “Other income.” Bingo or slot machines: $1,200 Keno: $1,500 Poker Tournament: $5,000 (excluding wager or buy-in amounts) “Other” gambling winnings: $600.
“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?”
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.
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.
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.”
States That Tax Gambling Winnings
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.