Pre-OBBBA Law: Taxpayers can claim a deduction for wagering losses to the extent of wagering winnings. Other deductions connected to wagering may also be claimed regardless of wagering winnings.
OBBBA permanently modifies IRC Section 165 so that all wagering deductions are limited in the following manner:
- The deduction for the year is equal to 90 percent of the amount of losses for the year, and
- Shall only be allowed to the extent of the gains from such transactions for the year.
Effective Date: Taxable years beginning after 2025
Gambling Gotchas: Losses are only allowed as an itemized deduction; thus, individuals taking the standard deduction receive no benefit from their losses.
Since winnings and losses can’t be netted, the full amount of the winnings ends up in a taxpayer’s adjusted gross income (AGI). The AGI is used to limit other tax benefits. So, the higher the AGI, the more other tax issues may be limited. Here are some examples:
- If an individual’s gambling winnings push their AGI for the year over the threshold amount, the gambling winnings, even if they had a net loss, can cause up to 85% of their Social Security benefits to become taxable.
- The addition of gambling income to a family’s income can result in significant reductions in the health insurance subsidy available through a government marketplace, requiring families to pay more for their health insurance coverage for the year. Additionally, if the subsidy was based upon estimated income for the year, if the family’s premiums were reduced by applying the subsidy in advance, and if they subsequently had some gambling winnings, then they could get stuck with paying back some or all the subsidy when they file their return for the year.
- If a taxpayer is covered by Medicare, the amount they are required to pay (generally withheld from their Social Security benefits) for Medicare B premiums is affected by their AGI two years prior. Gambling winnings added to AGI can cause the monthly Medicare premiums to increase by hundreds of dollars.
- If the gambling account is on-line in a foreign gambling account, it can trigger an FBAR and Form 8938 filing requirement.
Effective Date: Taxable years beginning after 2025