Ask the Slot Expert: Slots and taxes

I am a loyal fan of your column. You have taught me a lot about slot machines and I really appreciate the work you do.

My sisters and I really love playing slots. We are in some casino at least twice a month. We have long noticed that slot makers make games featuring every race under the sun except black.

Any thoughts as to why this is? It seems to me that black patrons support the gaming industry just as much as anyone else.

Hope you can shed some light on this for me.

Thanks for the kind words about my column.

There's no good reason for not featuring black people on some slot games.

One game that really shows a missed opportunity for diversity is Rich Life by Aruze Gaming, a Japanese company that is increasing its presence in the United States. My cousin enjoys playing this machine, so I frequently get roped into playing along with her.

When you start playing, you have to pick a character that will represent you on the game board on the big screen above the machines. Your choices are man or woman, blond hair with blue eyes or dark hair with brown eyes.

I just realized that I always pick the option that looks most like me, the man with blond hair and blue eyes, which is pretty close except that the blond hair I had as a little kid turned brown as I got older - and then fell out! With a little extra programming and graphics work, Aruze could have given more choices so more people could pick characters that resembled them.

I think the best way to deal with gambling wins and losses would be to have a single form on which both wins and losses are reported. Wins from W-2G or other wins would be entered, followed by losses. If losses exceed wins, nothing would be included in AGI.

One more point in this regard: People who purchase health insurance through the Affordable Care Act also have their subsidies affected by AGI. If wins are included, but not losses, they qualify for a smaller subsidy.

In Tax Help for Gamblers, my go-to guide for taxes and gambling, Jean Scott and Marissa Chien list these things that are affected by AGI: Social Security, Medicare premiums, IRA contributions, mortgage deductions, real estate taxes, charitable contributions, employee business expenses, medical expense deductions, rental real estate deductions, casualty loss deductions, child tax credit, earned income credit, DMV taxes, points on a home loan, investment interest, miscellaneous itemized deductions subject to the 2 percent limit, lifetime learning credit, Hope credit, retirement savings contribution credit, adoption credit and AMT. And, as you point out, ACA subsidies, which went into effect after the book was published.

I'm all in favor of people who can afford something (like health insurance) paying more so others who aren't as fortunate can afford that something too. The employee contribution to the health insurance at my current employer is tiered based on the employee's salary, with more highly compensated employees paying more than other employees. Although I'm not keen on having to pay more for my insurance than some other people, I think it makes a lot of sense.

I wouldn't have a problem with "winning" gamblers losing some benefits because of their increased AGI but, as we've pointed out many times in this discussion, a win reported on your Other Income line may really be only one side of a ledger that actually shows an overall loss.

Your suggestion is one solution - report your net win in Other Income. That's the way Schedule C and E income/loss are reported. Your solution makes the year one long session, a concept that the IRS does not accept, as we'll see in the next letter.

Love your columns, especially the April 22 column, Including Gambling Winnings in AGI Is Unfair. I, too, agree that the tax system isn't perfect, but we all have to live with it. However, there appears to be a very legitimate way around the issue of strictly including the W-2G amount on Line 21 of your Form 1040. I direct your attention to several United States Tax Court rulings and one IRS Notice that are right on point. These documents can be retrieved online with a Google search without any difficulty.

The tax court rulings are as follows:

1. Tax Court Memo 2009-226, Ann M. LaPlante, Petitioner v. Commissioner of Internal Revenue, Respondent
2. Tax Court Memo 2009-306, George D. and Lillian M. Schollenberger, Petitioners v. Commissioner of Internal Revenue, Respondent

As you will see from these two decisions, the key to determining gross income is to refine the definition of wagering transactions. Chief Counsel Advice 2008-011 (Dec. 5, 2008) states that a wagering gain or loss is recognized at the time the gambler redeemed his/her chips. Wins/losses left in play are not accessions to wealth until the gambler redeems his/her tokens (at the end of a gambling session) and can definitely calculate the realized amount above or below the amount wagered. Note that this is done for the purpose of determining gross income (Form 1040, Line 21) and may be less (perhaps significantly less) than the W-2G amount(s). This has nothing to do with determining the amount of losses to be reported as an itemized deduction on Schedule A, Line 28. That is a separate (although related) determination. Think winning sessions vs. losing sessions. Winning sessions are reported on Form 1040, Line 21. Losing sessions are reported on Schedule A, Line 28, up to the amount of the winning sessions on Form 1040, Line 21.

Furthermore, a proposed revenue procedure in IRS Notice 2015-21, Safe Harbor Method for Determining a Wagering Gain or Loss from Slot Machine Play, (also available online) supports the above by providing a safe harbor method for taxpayers to determine a wagering gain or loss from certain slot play. The key here is the strict definition of a "session of play" for purposes of calculating wagering gains and losses from electronically tracked slot machine play.

I won't rehash anymore of the content of these documents than I already have as I'm sure you can digest their content on your own and form your own opinion. I would be interested in hearing your thoughts on these documents.

Thanks for the kind words about my columns.

As I said above, my go-to guide for gambling-related tax issues is Tax Help for Gamblers. In it, Jean and Marissa also state that the key to reporting is what you define as a session. You report the total of your winning sessions on Form 1040 and the total of your losing sessions on Schedule A.

A year is too long for a session, so that rules out just reporting your net win on Form 1040. They also say counting a multi-day trip as one session would be hard to defend to an IRS auditor. Counting each machine as a session goes too far in the other direction. Can you imagine keeping track of how much you win or lose on each machine? I've done it and it is not only burdensome, but also error prone - mainly because of my poor handwriting.

I settled on breaking the day into three dayparts: morning, afternoon and evening. I use each daypart as one session and note my win/loss for each daypart. Switching casinos always starts a new session even if it is still, say, the afternoon.

I find it interesting that the Safe Harbor Method notice you cited says that a calendar day is acceptable for a session.

Now, I don't see the logic behind having to split my play from 10PM to 1AM into two sessions - it seems like one session to me. But Jean and Marissa say that whatever you define as a session, it should be consistent, reasonable and practical. If you're going to define a session as a calendar day, then you must be consistent and start a new session when the clock strikes 12 - Oh, wait! There are no clocks in the casino, let alone clock chimes or bells.

I'm still going to continue breaking my day into three parts and noting my results for each part. I can always combine them later on into daily totals.