New Legislation Extends Popular Tax Provisions

In one of its final actions, the 113th Congress passed the Tax Increase Prevention Act of 2014. This legislation extends for one year a host of popular tax provisions (commonly referred to as “tax extenders”) that had expired at the end of 2013. The President is expected to sign the legislation. All of the following provisions were among those retroactively extended, and are now effective through the end of 2014.

 

Deduction for qualified higher-education expenses

You may be entitled to a deduction if you paid qualified higher-education expenses during the year–this includes tuition and fees (for yourself, your spouse, or a dependent) for enrollment in a degree or certificate program at an accredited post-secondary educational institution. The deduction doesn’t include payments for meals, lodging, insurance, transportation, or other living expenses. The maximum deduction is generally $4,000. However, if your adjusted gross income (AGI) exceeds $65,000 ($130,000 if married filing jointly), your maximum deduction is limited to $2,000; if your AGI is greater than $80,000 ($160,000 if married filing jointly), you can’t claim the deduction at all.

 

Deduction for classroom expenses paid by educators

If you’re an educator, you may be able to claim up to $250 of unreimbursed qualified classroom expenses you paid during the year as an “above-the line” deduction. Qualifying expenses can include the cost of books, most supplies, computer equipment, and supplementary materials used in the classroom. Teachers, instructors, counselors, principals, and aides for kindergarten through grade 12 are eligible, provided a minimum number of hours are worked during the school year.

 

Deduction for state and local general sales tax

If you itemize deductions on Schedule A of IRS Form 1040, you can elect to deduct state and local general sales taxes in lieu of the deduction for state and local income taxes. You can calculate the total amount of state and local sales taxes paid by accumulating receipts showing general sales taxes paid, or you can use IRS tables. If you use IRS tables to determine your deduction, in addition to the table amounts you can deduct eligible general sales taxes paid on cars, boats, and other specified items.

 

Tax-free charitable donations from IRAs

If you’re age 70½ or older, you can make a qualified charitable distribution (QCD) of up to $100,000  from your IRA and exclude the distribution from your gross income. The distribution must be made directly to a qualified charity by December 31, 2014, and must be a distribution that would otherwise be taxable to you. QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA, just as if you had received an actual distribution from the plan. You aren’t able to claim a charitable deduction for the QCD on your federal income tax return.

 

Deduction for mortgage insurance premiums

 Premiums paid or accrued for qualified mortgage insurance associated with the acquisition of your main or second home may be treated as deductible qualified residence interest on Schedule A of IRS Form 1040. The amount that would otherwise be allowed as a deduction is reduced if your AGI exceeds $100,000 ($50,000 if married filing separately), and no deduction is allowed if your AGI exceeds $109,000 ($54,500 if married filing separately).

 

Bonus depreciation

You may be able to claim an additional first-year “bonus” depreciation deduction, equal to 50% of the adjusted basis of qualified property placed in service during the year. The additional first-year depreciation deduction is allowed for both regular tax and the alternative minimum tax.  The basis of the property and the regular depreciation allowances in the year the property is placed in service (and later years) are adjusted accordingly.

 

Expanded IRC Section 179 expensing limits

 Under IRC Section 179, if you’re a small-business owner you can generally elect to expense the cost of qualifying property, rather than to recover such costs through depreciation deductions. The maximum amount that can be expensed for 2014 now remains at $500,000 (the same limit that applied in 2013), rather than dropping to $25,000 had the legislation not passed. The $500,000 limit is reduced by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $2,000,000.

 

Exclusion of gain–qualified small-business stock

 Generally, you’re able to exclude 50% of any capital gain from the sale or exchange of qualified small-business stock provided that certain requirements, including a five-year holding period, are met. However, the temporary increase of the exclusion percentage to 100% that applied in 2013 is now extended to qualified small-business stock issued and acquired in 2014.

 

Other provisions extended

 Other provisions extended by the legislation include:

The ability to exclude from income the discharge of debt associated with a qualified principal residence

  • Provisions related to employer-provided mass-transit benefits
  • Special rules for qualified conservation contributions of capital gain real property
  • Provisions relating to business tax credits, including the research credit and the work opportunity tax credit

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

How to Report Gambling Winnings on Your Tax Return

Image courtesy of FreeDigitalPhotos.netRecreational gamblers must report their gambling winnings on line 21- Other Income on page 1 of Form 1040 U.S. Individual Income Tax Return.  The deduction for gambling losses is limited to the amount of winnings from wagering transactions I.R.C. § 165(d).  The gambling losses are reported as a miscellaneous itemized deduction on Schedule A.  Note, a taxpayer cannot take the standard deduction and still deduct his gambling losses.

The statute I.R.C. § 165(d) refers to gains and losses in terms of wagering transactions.  In order to calculate the gain or loss from wagering, the gambler would have to track each wager as a separate transaction and calculate the gain or loss per wager.  The Courts considered that interpretation as too burdensome and unreasonable according to IRS chief counsel advice memorandum A.M. 2008-011  December 5, 2008.  IRS chief counsel believes that the better view is that a casual gambler recognizes a wagering gain or loss at the time she redeems her tokens or cashes out of the slot machine. Wins that are left in the slot machine and used to continue wagering are not counted as income or winnings until the gambler cashes out and stops playing.

Shollenberger v Commissioner, T.C Memo 2009-306 determined that the Shollenbergers were recreational gamblers that should keep records of gambling wins and losses by sessions.  No court cases have defined the requirements of what constitutes a session, and the IRS has no clear ruling on the matter.  According to the Shollenberger case, on the day in question, they withdrew $500 from their joint bank account to take with them to the casino.  Mr. Shollenberger won $2,000 playing a dollar slot machine, and they each took $200 from his winnings to continue playing the slots.  They ended the day with $1,600, which they took to the bank and deposited the next day.  The IRS contended that the Shollenbergers should have reported the $2,000 jackpot as gambling income.  The court concluded that they net their winnings against the amounts wagered for that particular session of gambling.  The $2000 jackpot minus the original $500 minus the additional $400 wagered, resulted in a net taxable gambling gain of $1,100 for the session.  They should report $1,100 as gambling income on line21 Other Income of the Form 1040.  The Form W-2G that reported their gross winnings from the $2,000 jackpot should not be reported on line 21 as $2,000.

The IRS matches up the earnings reported on your tax return against the amounts reported to them from the Casino’s on Form W-2G.  If they do not match, you will most likely receive an IRS notice stating that you under reported your taxable income.  You should keep a log book of your wagering activity similar to a travel or mileage log book.

To help determine the beginning and ending of a session, consider the time, place, and activity.  Remember, when the chips are cashed in, that signals the end of the session.

Examples are as follows:

Time – When a gambler plays slot machines at the same casino for 2 days in a row, there are 2 separate sessions based on time.

Place – Playing the game on the same day at two different casinos is considered two separate sessions.

Activity – Changing from playing the slot machines to black jack would be considered changing activities and would be two different sessions.

Following is an example of a wagering log book and how the wagering gains and losses would be reported on your tax return.

Date

Location

Others present

Won

Beginning Cash

Winnings Wagered

Net Gain or (Loss) from Session

03/31/2014

River Spirit Casino

Joe Bob

$1500

$100

$600

$800

06/30/2014

Hard Rock Casino

Jim Bob

$2500

$200

$2000

$300

09/30/2014

Million Dollar Elm Casino

Jim Meister

$3500

$300

$3500

($300)

12/31/2014

River Wind Casino

Jimbo Rama

$4500

$400

$4500

($400)

2014 TOTALS

$12000

(Amount per

 W-2G)

$1000

$10600

$400

In the example log book above, the taxpayer should report gambling gains of $1100 on line 21 for Form 1040, and gambling losses on Schedule A Itemized Deductions of $700.  The net amount is $400 gain, but notice that the income amount on line 21 would have been $12000 of gross income if the taxpayer had reported the gross amount per the Form W-2G.  A taxpayer’s Adjusted Gross Income or AGI would be substantially higher if this session method were not used.  Because the AGI is used in numerous phaseout of deduction calculations, the taxpayer can be penalized by not having kept a good wagering session log book.

If you want to make sure you are legally optimizing how you report your gambling income on your tax return, please call (918) 212-9950.  We will prepare your return and make sure you don’t pay Uncle Sam more than his legal share of your gambling winnings!