In our last post , we discussed how having net gambling winnings of exactly zero could increase your 2013 income tax liability by $380. We had a reader pose the following points:
"Throw in some Social Security and a little more rent income and see what it does to your tax bill. Is it possible the gambling income could make your social security taxable where it was not before?"
To answer this readers question, I worked up some number assuming that a retired farm couple had $20,000 of rent income and $35,000 of social security income and no other sources of income. The farm couple also does not itemize their deductions. For 2013, with these facts, the couple would owe just a couple hundred dollars of federal income tax.
We then assumed the farm couple goes to the local casino and has net gross winnings of $250,000 and net gambling losses of $250,000. After inputting this information, the farm couple now has 85% of their social security income become taxable (there was a small amount before) which leads to an actual federal income tax liability of about $5,000 and we then have to add the net investment income tax of $760 ($20,000 rent income at 3.8%) for a total tax bill of about $5,800. The farm couple went from owing about $300 to $5,800 even though there net cash flow remained the same.
If the farm couple had even more net gambling winnings, part of their personal exemptions would begin to phase-out (gambling losses are not reduced by the same phase-out rules, other itemized deductions are).
As you can see, breaking even at the local casino can cost a farm couple of a lot of income taxes without having the extra cash flow to pay for it. These rules are getting more complex all of the time and I am thankful I have a computer to perform most of the calculations.