Some family members have net losses from gambling while another family member has a substantial gain from winning the lottery. You know that the family members are going to give the losing tickets to the winning family member. How would you handle the client if they insisted on taking the deduction?
The perspective of the losing family to hand over its tickets to the winning family is well reasoned, since it will help the winning family to lower the amount required to be paid for taxes. The lottery winners will be subjected to high taxes due to the high amount they have won, seeing the option of acquiring some losing tickets a better method to lower their taxes. However, the winning family will be breaking the law when they take the deduction. The situation can be dealt with by explaining to both clients on how taxation in gambling works, including the IRS and laws.
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First of all, the clients should understand that all gambling winnings are taxable income, meaning the income they acquire through gambling is subject to both federal and state income taxes. The taxes are conducted on the money one wins based on the fair market prizes (Spilker et al., 2019). Another important element that the client should understand is that both winnings and losses are tracked. The gambling-related activities and expenses are recorded per session by listing the date, the location where the gaming is taking place, the names of any person who also attended with the winner or loser, the activity conducted such as slots or poker, the machine number, the net win amount, the net loss amount, and the W-2G amount (Fishman, 2020). The other documentations that one should also have to support the taxation are the form W-2G for lottery winners, wagering tickets, cancelled checks, credit records, and bank withdrawals.
Since the winning family requires reducing their taxation, the best way that this can be done is through itemizing. The itemize process involves the use of your losing records to reduce the amount of tax on the winnings by listing the annual gambling losses as a miscellaneous itemized deduction on Schedule an of tax return (Tarlow & Co., 2019). The winning family should, therefore, use the documentation supporting their gambling activities through the year to develop a list of their winnings o their tax return and gambling losses. The losses will then be deducted from the winning, reducing the winnings that should be taxed, which enables them to avoid paying high taxes. However, the family will not be in a person to itemize if they cannot achieve the standard deduction of $24,000 as married couples (Tax Samaritan, 2020). Therefore, the gambling losses and other personal deduction, including those associated with AGI should exceed the standard deduction for the family to itemize their deduction. Additional, the losses from gambling hare not subject to the 2% of AGI reduction of miscellaneous deduction, which makes it easier for the winning family to itemize their deduction, especially if throughout the year had been losing more.
Therefore, the winning family will have the option of using the itemize to reduce the tax payable for the lottery won. However, the family cannot consider taking the deduction offered by the losing family is that would be going against the IRS and taxation laws, which might result in legal penalties for both the clients and the provider if discovered.
References
Fishman, S. (2020). Tax Rules for Gambling Income and Losses . Lawyers.com. https://www.lawyers.com/legal-info/taxation/income-tax/tax-deduction-for-gambling-or-wagering-losses.html
Spilker, B., Ayers, B., Outslay, E., Weaver, C., Barrick, J., Robinson, J., & Warsham, R. (2019). Mcgraw-Hill's Taxation Of Individuals And Business Entities 2020 (2020 ed.). Mcgraw-Hill Education .
Tarlow & Co. (2019) . If You Are a Recreational Gambler, Here Are Some Tax Issues You Need to Know . Tarlow. https://tarlow.com/2019/01/21/gambling-tax-issues-2/
Tax Samaritan. (2020). Gambler Tax Preparation . Tax Samaritan. https://www.taxsamaritan.com/tax-preparation-services/gambler-tax-preparation/
