The United States Internal Revenue Service has long allowed taxpayers to deduct their gambling losses from their federal income tax liabilities. As states expand their gaming options, like has already taken place in terms of West Virginia gambling, they are seeing the merit in that provision.
West Virginia is the latest state to allow residents to deduct their gambling losses from their state income taxes. There are some important conditions for West Virginians to note, however.
Gambling losses are now tax deductible in West Virginia
Gov. Jim Justice signed HB 2821 into law on March 29. The simple bill focused on amending the state’s income tax code. The big change is that losses occurring from taking part in legal gambling in West Virginia are now deductible.
West Virginia is not the first state to make gambling losses tax deductible. For example, Michigan enacted a similar provision last year. The aims of such changes are consistency and fairness. The change makes filing state income taxes more like completing an IRS return.
Additionally, the changes increase fundamental fairness in taxation. As all gambling winnings are taxable income, it’s only fair that taxing bodies also allow deductions for gambling losses. At this time, however, there is little similar legislation in other states with legal gambling and state income taxes.
It’s a welcome change for gamblers. There are some rules that West Virginians should observe, however.
Terms and conditions of the new law
It’s important to read every word of this new law. The document lays out exactly how West Virginians should take advantage of this provision when filing their state income tax returns.
There are eight points that such players should be aware of when preparing their tax returns for the state.
No. 1. The changes apply to your state returns, not your IRS filing
As previously mentioned, the IRS has allowed gambling deductions on personal income tax filings for decades. This new law does not affect your federal filings in any way. West Virginia does not regulate that. The US Congress and the IRS do.
This new law only affects state income taxes in West Virginia.
No. 2 You can’t deduct more than you won in a year
Just like the IRS, West Virginia caps your deductible losses at the amount of your winnings for a tax year. Even if you lost more money than you won during a certain year, you can only deduct up to the amount of your winnings.
No. 3 The change is retroactive to tax year 2020
If you’ve already filed your West Virginia tax return for 2022, fret not. The law backdates this change to tax year 2020. That means you can amend your previous returns to reflect this change if you like.
Consulting a tax professional will help you determine whether that is the best choice for your situation.
No. 4 You don’t have to itemize your deductions
People who have claimed gambling losses as a deduction from their IRS returns know that the IRS requires you to itemize your deductions to do so. That won’t be the case for your state income tax filing under this new law in West Virginia.
If you took the standard deduction on your IRS return, you can still deduct your West Virginia gambling losses from your taxable income for the state of West Virginia.
No. 5 The deduction only applies to gambling losses incurred in-state
The law is very clear that the deduction only applies to losses taken while gambling in West Virginia. If you had any losses from the past three tax years that happened in other states, those are not deductible from your West Virginia income tax liability. They would still be deductible from your federal taxes, however.
No. 6 The deduction only applies to gambling losses incurred through regulated channels
If you lost some money on an unlicensed online gambling site or from a card game with a friend, you can’t deduct those losses. Only licensed West Virginia casinos, sportsbooks, and tracks along with the West Virginia Lottery apply here. Losses from both physical and online licensed gambling channels are valid in the state.
No. 7 You can’t double-dip
Like most other states, West Virginia uses your federal adjusted gross income (AGI) as the measure of how much tax you owe. This is an important caveat. If you chose to itemize your deductions on your federal return and claimed some West Virginia gambling losses to reach your AGI, you can’t claim those losses again on your state income taxes.
That would represent deducting such losses twice.
No. 8 The burden is on you as the taxpayer
This is perhaps the most important point. It’s on you as the taxpayer to prove that your deduction represents a legitimate gambling loss. The best way to do so is to keep detailed records of your gambling activity. Bank statements, receipts, and gambling company loyalty or rewards statements are very helpful in this regard.
While those are all the particulars you should observe regarding this tax change, there is yet another important point of emphasis. As always, responsible gambling is crucial.
Deductible losses are still losses
The fact that West Virginians can now deduct their gambling losses from their state income taxes does not mean that playing responsibly no longer matters. If anything, it’s even more important to play the right way.
Being able to deduct your gambling losses does not equate to getting back any money you lose while gambling at the end of the year. It simply means that the amount of your income the state taxes you on might be a little smaller.
Over the year, you still need to observe responsible gambling practices like setting a budget and sticking to it. Additionally, only gambling what you can comfortably afford to lose remains paramount.
With all that being said, this change is a positive development for West Virginians. Hopefully, more states will follow suit soon.