Your March Madness Gambling Losses Could Soften the Blow of Tax Season

Advisor VoicesMar 22, 2016
Your March Madness Gambling Losses Could Soften the Blow of Tax Season
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Late March is upon us, and that means tax season and the NCAA college basketball playoffs are underway. March Madness makes this time of year a little more fun, as fans get to delight in the roller coaster ride of triumphs and upsets.

Not only does the sheer enjoyment of college basketball make tax season a little less of a bummer, if you're betting on the playoffs and you're itemizing deductions on your tax return, you may be able to turn your gambling losses into a tax win. You can deduct your legal gambling losses up to the amount of your winnings for the year. That's right, March Madness is the gift that keeps on giving.

Winning your bracket pool and proving your college basketball analytic prowess may be more about pride than money. And yes, if you lose, taxes will be the last thing on your mind. But a tax write-off could help soften the blow.

Gambling loss deductions

Now don't get too excited thinking you can just go to Las Vegas, lose all your money and charge it to Uncle Sam, because that isn’t the case. And we should point out that gambling is not the best way to spend your money or reduce your taxes.

But if you do decide to go that route, here's how gambling loss deductions work. If you gambled this year and you have winnings, you must report those winnings as ordinary income. But to prevent Uncle Sam from taking too large a chunk out of your lucky streak, you can lower the taxes you pay on your winnings by itemizing your deductions and deducting your legal gambling losses.

Normally, itemized tax deductions are subject to a "floor" limitation, which means that the loss has to exceed a certain percentage of your adjusted gross income in order for you to take a deduction. But with gambling losses, the government allows you to deduct all of your losses up to the maximum amount of your winnings. So, for example, if you win $2,000 and lose $3,000 in the same tax year, you may deduct the $3,000 worth of losses from your $2,000 in winnings. This reduces the tax burden of your gambling winnings tax to $0. The extra $1,000 in losses will just be a constant reminder that a 16th-seed team probably isn't the best bet to win it all.

Key considerations

There are two things you should know before counting on this tax break to ease the pain of a bad bracket pick:

  • You can't deduct your gambling losses against any income other than gambling winnings. You can't deduct them against capital gains, ordinary income or passive income.

  • You can't carry over your gambling losses into another tax year as you can with passive losses and capital losses. It's a one-and-done deal. This minimizes the incentive to lose on purpose just to decrease your taxes.

Also, only taxpayers who can itemize their deductions can deduct their gambling losses. If your gambling losses plus your other itemized deductions — things like investment income expenses, employee expenses and mortgage interest — don't add up to more than the standard deduction, you can't itemize and can't use your gambling losses to decrease your tax bill. (The standard deductions are $6,300 for a single tax filer and $12,600 if you're married and filing jointly in 2015.) You will still have to report your gambling winnings.

So remember this the next time you lay down a bet on your favorite college hoops team or place your faith in the underdog with a 5-foot-7-inch point guard: You might want to hedge your long shots with a more likely winner so you have something to deduct those losses from. Place your bets wisely and good luck.

Jerry D. Mitchell II is a fee-only financial advisor and the CEO of Incite Wealth Management LLC in Orlando, Florida.

Image via iStock.