A taxpayer had $50,000 of wages and $3,000 of gambling winnings. They had $4,000 of gambling losses. They itemize deductions. What is the impact on taxable income?

Answer options:

Increase AGI by $3,000; Deduct $4,000 on Schedule A.

Increase AGI by $3,000; Deduct $3,000 on Schedule A.

Net impact $0 on AGI; no deduction.

Increase AGI by $0; Deduct $1,000 on Schedule A.

How to approach this question

1) Include FULL winnings in AGI. 2) Deduct losses on Sch A (Itemized) ONLY up to amount of winnings.

Full Answer

B.Increase AGI by $3,000; Deduct $3,000 on Schedule A.✓ Correct

Gambling winnings ($3,000) are fully included in Gross Income (AGI). Gambling losses are deductible as an itemized deduction (Schedule A) but only to the extent of gambling winnings ($3,000). The excess $1,000 loss is lost.

Common mistakes

Netting the amounts on the front of the return.

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