John Hermann
John Hermann
ThursdaySep 7 at 11:28pm
The Letter of the Law
F-J Question 2: Some family members have net losses from gambling while another family
member has a substantial gain from winning the lottery. You know that the family members are
going to give the losing tickets to the winning family member. How would you handle the client
if they insisted on taking the deduction?
It appears the family is trying to unethically and improperly exercise an income-shifting
strategy. The short answer is not to get involved and risk one’s CPA designation. This action is
under the presumption that one tried to reprimand the family’s choice of action, and the family
chooses to disregard one’s professional advice. The way for income-shifting to work is through
reasonable salary employment of a family member. (Spilker et al., 2023) Gambling is not a form
of work for the majority of people. Perhaps one could argue that poker is a sport and,
therefore, a business. However, a lottery is a statistical probability with no form of service or
production. It does not involve the employment of faculty. Therefore, one family member's
success cannot be offset by the loss of the other family members.
Another reason the income-shifting strategy is of no good here is that even before they receive
the cash, they will have to pay sales tax on the total profit. (Spilker et al., 2023) The merging of
assets would be post-tax, not pretax.
The Heart of the Law
Now that we have looked at some legalistic aspects of the concept of gambling and income
shifting, let us look at the Christian ethical side. In God’s Word, He says, "The love of money is
the root of all kinds of evil." (1 Timothy 6:10) Gambling is an activity in which one loves money
enough to risk all their possessions, including their money, in hopes of quickly gaining more
assets. The money is put in the place of God.
Money is not God. Joseph Campbell said it well: “Money is congealed energy.” It is a valuation
of one’s life. We are not our own but God’s possession. He says, “You were bought at a price.
Therefore, honor God with your bodies. (1 Corinthians 6:20) Therefore, when we waste the
money we earn, we disrespect God and hurt others because no one is entirely detached from
all others, that their actions do not affect another.
Scholarly Journal
A recent scholarly journal shows the consequences of the Supreme Court ruling that opened up
sports gambling. The study shows that the consequences of the tax benefits from the new form
of gambling are exploitative to lower and middle-class citizens and families. (Whelan, 2023) The
tax provides an itemized deduction for individuals who gamble large amounts. (Whelan, 2023)
However, if you are poor or middle class, that means you lost a substantial amount of money,
not a substantial amount of leisurely money. The key is money versus leisurely money. The
lower and middle-class bid in the hope of getting more money quickly. The rich bid for the sake
of leisure and fun. In general, gambling only brings destruction, crime, and demoralization to
societies where it is allowed to reside.
Citation
McGraw-Hill’s taxation of individuals and business entities 2024. (2023). MCGRAW-HILL
EDUCATION.
The holy bible: New international version. (2005). . Zondervan.
Whelan, K. (2023). US taxation of gambling winnings and incentives to bet. Journal of Gambling
Studies, 39(3), 1253-1271. https://doi.org/10.1007/s10899-023-10189-zLinks to an external
site.
Read Less
Good morning John,
Thank you for your post on F-J Question 2: Some family members have net losses from
gambling while another family member has a substantial gain from winning the lottery. You
know that the family members are going to give the losing tickets to the winning family
member. How would you handle the client if they insisted on taking the deduction?
I agree with your perspective that the family is trying to exercise an income-shifting
strategy unethically and improperly. If a client insists on taking a deduction for gambling losses,
it is important to inform them about the relevant tax regulations and guidelines. In general,
gambling losses can be deductible, but only up to the extent of gambling winnings. This means
that if a family member has net losses from gambling, they can only deduct those losses to the
extent of any gambling winnings reported by them or other family members. It is crucial to
educate the client about the requirement to report all gambling winnings and losses accurately
and in compliance with tax laws. They should be made aware that attempting to take
deductions for losses that exceed their reported winnings can potentially raise red flags with tax
authorities and may lead to further scrutiny or penalties. (Spilker et al., 2023)
The Internal Revenue Service (IRS) considers the following rules when it comes to
gambling. Gambling winnings as the following rules apply to casual gamblers who aren't in the
trade or business of gambling. Gambling winnings are fully taxable, and you must report the
income on your tax return. Gambling income includes but isn't limited to winnings from
lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of
prizes, such as cars and trips. A payer is required to issue you a Form W-2G, Certain Gambling
Winnings if you receive certain gambling winnings or have any gambling winnings subject to
federal income tax withholding. You must report all gambling winnings on Form 1040 or Form
1040-SR (use Schedule 1 (Form 1040)PDF), including winnings that aren't reported on a Form
W-2GPDF. When you have gambling winnings, you may be required to pay an estimated tax on
that additional income. For information on withholding on gambling winnings, refer to
Publication 505, Tax Withholding and Estimated Tax. When it comes to gambling losses, a
person may deduct gambling losses only if you itemize your deductions on Schedule A (Form
1040) and kept a record of your winnings and losses. The amount of losses you deduct can't be
more than the amount of gambling income you reported on your return. Claim your gambling
losses up to the amount of winnings, as "Other Itemized Deductions." (https://www.irs.gov).
While the Bible does not specifically address the subject of gambling, it does give us
numerous principles throughout the scriptures that can guide us on this issue. The Bible does
not say, “You shall not gamble,” or “gambling is wrong,” but it does say in 1 Corinthians 6:12
New King James Version 12 All things are lawful for me, but all things are not [a]helpful. All
things are lawful for me, but I will not be brought under the power of any. The scripture is
basically telling us that while we have free will to to do many things, we should never be
brought under the control of anything other than God . Gambling, like many things in life, can
become addictive. Further, it becomes a means of getting rich quick or of seeking fortune apart
from constructive labor or work that is truly beneficial to society. God has given each of us
talents, abilities and training that we can utilize to provide for our family, be productive
members of society and follow Christ with our whole heart and mind.
References
Spilker, B.C. (Ed.), Ayers, B.C., Lewis, T.K., Weaver, C.D., Barrick, J.A., Robinson, J.R., Worsham,
R.G.. (2024). Taxation of Individuals and Business Entities (15th ed.). McGraw
Topic No. 419, Gambling Income and Losses (2023). (https://www.irs.gov)
1 Corinthians 6:12 NKJV. (2023). https://www.biblegateway.com/
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