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Discussion:This made me go hmmmm...

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Discussion Forum Index --> Advanced Tax Questions --> This made me go hmmmm...


Discussion Forum Index --> Tax Questions --> This made me go hmmmm...

Taxmonkey (talk|edits) said:

3 April 2014
Taxpayer developed a gambling habit during the year, but did hit a "big one" and got a W-2G reporting winnings of $200k and state tax withheld of $10k. Taxpayer gave it all back to the casino and more with good records, over $200k in gambling losses. Ignoring other deductions, what would you put on the Schedule A?

Just to make it more interesting, taxpayer also let business slide during the year and sustained a $50k business loss. What would put on line 6 of the 1045 schedule A (non business deductions)?

Ckenefick (talk|edits) said:

3 April 2014
How about $200k.

Taxmonkey (talk|edits) said:

3 April 2014
Why not $210k?

The instructions to the 1040 clearly state that state taxes withheld on the a W-2G may be deducted if you itemize and claim state income tax withheld rather than the general sales tax.

They also say that gambling losses to the extent of gambling winnings reported on the 1040 are deductible.

Seems to me that $210k, would be allowed.

Ckenefick (talk|edits) said:

3 April 2014
Of course the state withholding is allowed as an itemized deduction. You said "ignoring other deductions," so I thought you meant how much to show as gambling losses only...

Doug M (talk|edits) said:

3 April 2014
That deduction is described as "state income taxes on trade or business income"

I see it as $210K non-business deductions. 200K.

Taxmonkey (talk|edits) said:

3 April 2014
From IRC 164

"In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income).

Gambling is producing taxable income and therefore described in section 212, I think?

Ckenefick (talk|edits) said:

3 April 2014
Except it is described in the preceding sentence, because it's deductible whether or not related to a trade or business or to the production of income.

Mscash (talk|edits) said:

3 April 2014
The winnings are income and the losses are itemized deductions. I'll do you one better. I had a client who brought in his players club statement showing winnings of $1 Million and losses of $1.1 Million and then took a trip to Bankruptcy Court to file a Chapter 13. The Chapter 13 trustee had a cow about it (and also questioned including the wife's name and Social Security number as required on the separate return.) The good news was that he had an outsized deductions for optional sales tax but overall came out worse than if he had not gambled and settled for standard deduction.

Taxmonkey (talk|edits) said:

3 April 2014
The preceding sentence:

"Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued: (1) State and local, and foreign, real property taxes. (2) State and local personal property taxes. (3) State and local, and foreign, income, war profits, and excess profits taxes. (4) The GST tax imposed on income distributions. (5) The environmental tax imposed by section 59A. (6) Qualified motor vehicle taxes. "

I don't think income taxes are there, I think its covered under the 212 clause.

Ckenefick (talk|edits) said:

3 April 2014
State and local, and foreign, income, war profits, and excess profits taxes.

Is it hiding?

Taxmonkey (talk|edits) said:

3 April 2014
LOL I guess so, talk about burying the lead.

Doug M (talk|edits) said:

4 April 2014
I always have looked at it this way.

If the state income tax at question arose from withheld taxes on wages, business deduction since the wages are considered business income.

State taxes as a result of taxes paid/owing on non-business income (gambling) is a non-business deduction. We are talking about an NOL, and what is considered a non-business deduction vs. a business deduction. Not what is deductible on a Schedule A under IRC 164

Doug M (talk|edits) said:

4 April 2014
Taxmonkey-I agree that it is a non-business deduction. Yes, it belongs on line 6 since it is a non-business deduction

Most people want it to be a business deduction, which many times it is, to keep intact or increase the NOL.

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