This post is about your gambling and how it affects your income tax return.
Here in Missouri, we’ve got casinos so I get to see a fair number of W-2Gs; that’s the form you get when you win at a gambling event. Not everybody receives a W-2G for their winnings; you need to win over a certain amount before one is issued. The limits go like this:
- $1,200 or more for winnings from bingo or slot machines
- $1,500 or more from keno (proceeds minus the amount of the wager)
- Over $5,000 in winnings from a poker tournament
- $600 or more in winnings (except for what I’ve already mentioned) and the payout is at least 300 times the amount of the wager; or
- Any other gambling winnings subject to federal income tax withholding
When you get your W-2G, you report your gambling winnings on the other income line of your 1040 tax return. (Line 21)
If you have gambling losses, you may claim a deduction for your losses up to the amount of your winnings on your Schedule A itemized deductions page. (Line 28)
That’s all pretty easy, but there’s some picky stuff you’re going to want to know. First, you need to keep records of your losses if you want to deduct them. Now many casinos track that for you, but for the IRS you really should keep a log. If your gambling is more in the form of horse racing or lottery tickets, keeping cancelled tickets supports your loss claim.
Also, although you can deduct your losses up to the amount of your winnings on your Schedule A—if you don’t already itemize, this might not help you much or even not at all. For example: let’s say you’re single and win $5,000 at a slot machine. You don’t already itemize. Your standard deduction is $5,800—in this case, you might not get any value from itemizing your gambling deduction. This deduction is much more valuable for people who already have other things to write off like mortgage interest.
Another issue for gamblers, even if you can deduct all of your gambling winnings on the Schedule A, is that the gambling income will increase your “Adjusted Gross Income” (AGI). Now before I lose you with tax jargon, let me explain why that’s important. The AGI number is figured before you subtract the Schedule A deductions. The AGI number is used to figure a lot of other tax deductions and credits.
If you normally have a low AGI and you qualify for things like the Earned Income Tax Credit or the Child Tax Credit, and you win big at gambling, even though you can deduct all of those winnings, the gambling makes your AGI number bigger. A big AGI can make your tax credits smaller or even eliminate them completely. I’ve seen families lose their entire EIC refund because they have gambling winnings that they had to report.
On the flip side, let’s say you’re a high income earner and you’ve got a big gambling win. When your AGI goes up and it can trigger the Alternative Minimum Tax. Once again, even though you’ve written off your gambling winnings completely, you can still get socked with more tax. I’ve had that happen to clients as well.
Now you might be thinking—well gee, I just won’t report my gambling winnings at all. Sorry, but that’s not an option. W-2Gs are reported to the IRS. If you don’t report your gambling winnings, you will get a letter.
I didn’t mean to sound like a complete party pooper. Let’s face it, if you win big that’s pretty cool! But if you do win big, it makes sense to do a little tax planning. You want to enjoy the fact that you won and not have to suffer for it months later.
Editor: And remember, what happens in Vegas, stays in Vegas!
Did you get your W2 from your job and it looks like some foreign language? All the little boxes have some letter or number attached, but what does it all mean? Let me walk you through it.
The two most important parts are: ‘How much did you make?’ and ‘How much tax did Uncle Sam take out?’
Box 1: Wages, tips and other compensation. That’s how much you made; it’s going to go on line 7 of your 1040 or 1040A federal income tax return (line 1 on the 1040EZ).
Box 2: Federal income tax withheld. That’s the tax you paid. It goes on line 62 of the 1040 (line 7 on the EZ and line 36 on the 1040A).
The other numbers aren’t quite so important, but if you’re curious, I’ll explain the rest for you just so you know.
Box a: Employee’s social security number. That’s your social security number. If you don’t have a social security number, they’ll use your ITIN number. It’s important that your social security number is listed correctly. If there’s a mistake here, you should ask your employer for a corrected W2.
Box b: Employer identification number (EIN). That’s the ID number for the company you work for. It’s kind of like a business social security number. If you’re preparing your own tax return online, you’ll have to type that in correctly. A mistake here will get your tax return rejected.
Box c: Employer’s name, address, and ZIP code. Although this seems pretty obvious, this can really confuse people. Let’s say you work at a McDonald’s in St. Louis but when you get your W2, it says you work for Fred Jones LLC with an address in Kansas. A lot of times companies have their “legal” names, and their “doing business as” names. Usually, it will say the DBA name also, but not everyone does that. Don’t die of shock if you see a funky name, it’s pretty normal and legal.
Box d: Control number. Often, that’s blank. If there is something there, you don’t have to worry about it. That’s more of a code for bookkeeping purposes. I have one employee and I had to give him a code for my payroll program. I didn’t know what to do; 7-11 was the first thing that popped into my head (because I had stopped for a Slurpee.) Hopefully, if you have a control number, more thinking went into it than with my company.
Box e: That’s your name. Check, make sure you got the right W2. I was just working on a tax return and the person had been given someone else’s W2. Weird stuff happens.
Box f: That’s your address. If it’s wrong, you can hand write the correct address. Unlike an incorrect social security number which really needs to be fixed by your employer, an incorrect address is not that big of a deal.
We’ve already talked about boxes 1 and 2 being wages and federal income tax withholding. Now let’s talk about those other numbers.
Box 3: Social security wages. Usually, this will match box 1. There are a couple of things that will make those boxes not match.
- You’ve made contributions to a 401(k) or 403(b) retirement plan. You’ll know if you did that by looking at box 12 and finding a code D there. Generally, if you take the amount of money in box 12 and add it to box one, you’ll get box 3.
- If you made over $106,800 your box 1 and box 3 numbers will also be different. It’s called the “wage base limit.” Basically, once your income goes over $106,800 you don’t pay any more social security tax. So the number in box 3 won’t go over $106,800. If you had two jobs and your combined income goes over that number, you can get a refund of your excess social security withholding.
Box 4: Social security tax withheld: For 2011 that number is .042 times whatever is in box 3 – plain math. If you have something in box 7 (tips) then it should be .042 times the wages plus the tips.
Box 5: Medicare wages and tips: Usually, this matches box 3. If you earned tips, that gets added in; also if you took money out for retirement, that’s added in too. Also, there’s no cap on the amount of money you pay medicare tax on, so if you made over $106,800 then you pay tax on your entire wage.
Box 6: Medicare tax withheld: plain math, .0145 times whatever is in box 5.
Box 7: Social security tips: unless you’re wait-staff at a restaurant, you probably will have nothing listed there. This box is for tips you reported to your employer. Usually, it’s the tips that you got on credit card receipts.
Box 8: Allocated tips: This is one to watch out for. Once again, for most people, it’s blank. If you work in a restaurant and you have a number in this box you want to look hard at this number. That means that your boss decided that you didn’t report enough tips and so he “allocated” tip money to you. You have to pay tax on that. Now if you really did earn that in tips, then it’s no problem. But if you’re working at a place with lousy tips and there’s a big number in box 8, you’ve got some issues. The only way to fight this is to keep a really good log of your tip income. Most people don’t keep a log, and then when they get the “allocated tip” item on their W2 it’s too late.
Box 9: Nothing’s there.
Box 10: Dependent care benefits: That’s for when your company pays for your day care. If there’s something in this box, your tax return must have a form 2441 for child care expenses attached to it.
Box 11: Non-qualified plans. For most people this is blank. A non-qualified plan is retirement money that you don’t get to deduct.
Box 12: This is where all the extra goodies go. It could be a whole other blog post. Bottom line, the most common item is coded D or E for retirement funds. For the full list, you can look at the IRS website: http://www.irs.gov/pub/irs-pdf/fw2.pdf. It starts on page 7 and finishes on page 9. Some of those codes require you to file extra forms—for example a code V means you must file a Schedule D (employee stock options) and a code L means you must file a form 2106 (employee business expenses.) If you’re seeing codes in box 12, it’s at least worth a phone call to a professional just to double check what you need.
Box 13: Those are check boxes for statutory employee (means you’ll need a schedule C), retirement plan (which may limit how much you can contribute to an IRA), and third-party sick pay.
Box 14: Other. Usually that’s blank. Sometimes it lists things like union dues or United Way contributions. A lot of times I find the stuff that should have gone into box 12 in box 14, so always look at it if there are numbers in there.
Boxes 15 and up contain your state and local income tax information. 15 has the state and the employer’s state ID number. That’s important to have if you’re e-filing your return.
Box 16: State wages. This usually matches box 1, the federal.
Box 17: State income tax withholding. You’ll need this information to file your state tax return.
If you live or work in an area with a local tax, like St. Louis City, your local tax information will also be listed.
And that’s what’s in your W2.
I love tax-free income. The great thing about tax-free municipal bonds is the tax-free part. The downside is that they usually pay a lower interest rate than taxable bonds. For many people, tax-free trumps taxable every time—but you have to be careful because they’re not always the best deal for everybody. This is what you need to know:
1. While municipal bonds are tax-free on your federal return, they may be taxable on your state return. Usually, if the municipal bond is for your own state, then it’s not taxable. For example, here in Missouri, if I buy a bond from St. Louis County—that’s not taxable on my Missouri return. But if I bought a tax-free bond from New Jersey, then I’d pay tax on that interest. Buying at home gives you better bang for your buck.
2. Even though your municipal bond interest isn’t taxable, it could make your Social Security income taxable instead. Say what? That sounds a little crazy, doesn’t it? Let’s say you’re a senior citizen with moderate income. You’ve got your social security check, a small pension, a little interest from a CD and a bank account, and most of your other cash tied up in tax-free municipal bonds. With social security income, you’ve got that funky formula where you take half of the social security and add it to the other income and if it crosses the threshold, then part of your social security benefits become taxable. Are you rolling your eyes yet? The computer does this all for you right? But – and this is the important part—your tax-free municipal bond interest gets added into that equation. If you’re one of those borderline seniors, that tax-free bond isn’t saving you as much money as you thought. You might want to look at other, higher return investments.
3. The dreaded AMT. If you’re a high income earner, tax-free income sounds like a great investment doesn’t it? But you’ve got to be careful if you’re dealing with the Alternative Minimum Tax. If you’re in the AMT zone, you want to stay away from what’s known as a “private activity bond.” A private activity bond is when a company like GM wants to raise money, but instead of GM issuing a bond itself, it has the local government issue a bond for it (for example for building a plant in the area). It’s still a tax-free municipal bond, but it’s actually for a private business so it’s called a private activity bond. If you’re an investor that doesn’t have to pay AMT taxes, you’re fine, you get all the benefits of tax-free income. If you’re paying AMT, then you’ve lost all the benefit of the tax-free income. Private activity bond income is taxable under AMT rules.
With the stock market going crazy and many people turning to bonds, it’s important to know the real tax effects of “tax-free” on your tax return.