If a high-income New York taxpayer's gambling losses are fully deductible up to gambling winnings for federal tax purposes, are those losses just as fully deductible on the taxpayer's New York return?

Plain-English summary

Sam J. Nolo, CPA, asked the Department to confirm that a high-income New York taxpayer's gambling losses would be just as fully deductible on the New York return as they are on the federal return. The hypothetical taxpayer had New York adjusted gross income over $100,000, itemized deductions, was not a professional gambler, and in one year had $1,000,000 in gambling winnings against $1,200,000 in total gambling losses.

For federal purposes, the answer was straightforward: IRC § 165(d) caps the gambling-loss deduction at the amount of gambling winnings, so the taxpayer could deduct $1,000,000 (not the full $1,200,000 of losses). Better still, that $1,000,000 deduction escapes both the 2%-of-adjusted-gross-income floor on miscellaneous itemized deductions (IRC § 67) and the overall limitation on itemized deductions (IRC § 68) that otherwise trim itemized deductions for higher earners. So, federally, the taxpayer keeps the full $1,000,000 deduction.

New York, however, computes its own itemized deduction under Tax Law § 615, and that computation does not track the federal exemptions for gambling losses. Tax Law § 615(f) requires that a high-income taxpayer's otherwise-allowable New York itemized deduction be reduced - up to 25% under § 615(f)(1) and up to another 25% under § 615(f)(2), for a combined maximum reduction of 50% - once New York adjusted gross income exceeds specified thresholds ($100,000 for a single filer, $200,000 for a married couple filing jointly, $150,000 for a head of household, with a further threshold of $475,000 driving the second 25% reduction). Nothing in § 615(d) (which lists modifications that can increase the federal itemized deduction for New York purposes) or in § 615(f) itself exempts gambling losses from this reduction. The Department therefore concluded that the taxpayer's $1,000,000 gambling-loss deduction, though fully allowed federally, could be reduced by up to 50% - down to as little as $500,000 - purely because of the taxpayer's income level, regardless of the nature of the underlying deduction.

The Department also rejected Petitioner's suggestion that the "claim of right" relief in IRC § 1341 might help. That provision applies only to income that was reported in a prior year under a mistaken belief of an unrestricted right to it, and later had to be repaid - a fact pattern with nothing to do with ordinary gambling winnings and losses.

What this means for you

High-income individuals with gambling winnings and losses

Don't assume that a gambling-loss deduction that survives intact on your federal return will do the same on your New York return. If your New York adjusted gross income is above the § 615(f) thresholds, your total New York itemized deduction - including the part attributable to gambling losses - can be reduced by up to 50%, even though federal law (IRC § 165(d), and the exemptions from IRC §§ 67 and 68) protects that same deduction from any haircut at the federal level.

Accountants and tax preparers computing the New York itemized deduction reduction

When preparing a New York return for a high-income itemizer, remember that Tax Law § 615(f)'s reduction applies across the board to the taxpayer's total otherwise-allowable New York itemized deduction, without regard to the character or federal treatment of any particular component. A deduction that is exempt from the federal 2%-of-AGI floor and the federal overall limitation - such as gambling losses under IRC § 165(d) - gets no comparable carve-out in § 615(d) or § 615(f), so it still gets folded into (and reduced by) the state-level calculation.

Common questions

Q: Why is the federal gambling-loss deduction capped at $1,000,000 instead of the full $1,200,000 in losses?
A: IRC § 165(d) only allows gambling losses to be deducted up to the amount of gambling winnings for the year. Here winnings were $1,000,000, so that is the ceiling on the federal deduction regardless of the $1,200,000 in total losses.

Q: If the federal gambling-loss deduction is exempt from the 2% floor and the overall itemized-deduction limitation, why can New York still cut it?
A: Those exemptions (IRC §§ 67 and 68) only apply to the federal computation. New York computes its own itemized deduction under Tax Law § 615, and the high-income reduction in § 615(f) is a separate, state-specific mechanism with no matching exception for gambling losses.

Q: How large can New York's reduction under § 615(f) be?
A: Up to a combined 50% of the otherwise-allowable New York itemized deduction - up to 25% under § 615(f)(1) and up to another 25% under § 615(f)(2), each phased in as New York adjusted gross income rises above the applicable thresholds.

Q: What income thresholds trigger the § 615(f) reduction?
A: The first 25% reduction phases in above $100,000 of New York adjusted gross income for single filers, $200,000 for joint filers, and $150,000 for heads of household. The second 25% reduction phases in separately above $475,000 of New York adjusted gross income for all filers.

Q: Could the taxpayer instead use IRC § 1341 "claim of right" relief to avoid the New York reduction?
A: No. Section 1341 applies only to income reported in an earlier year under a mistaken belief of an unrestricted right to it, which was later repaid. Ordinary gambling winnings and losses in the same year do not fit that fact pattern, and the Department expressly rejected this argument.

Q: Does this ruling mean gambling losses are treated worse than other itemized deductions in New York?
A: No - gambling losses are treated the same as any other component of the New York itemized deduction once the § 615(f) reduction applies. The point of the ruling is that no deduction gets a special carve-out from § 615(f) just because it happened to escape limitations at the federal level.

Citations and references

• Tax Law § 612(a) - New York adjusted gross income of a resident individual is federal adjusted gross income with specified modifications; none of those modifications exclude gambling winnings
• Tax Law § 615(a) - a resident individual who itemizes for federal purposes may elect to deduct the New York itemized deduction in lieu of the New York standard deduction
• Tax Law § 615(d) - lists modifications that can increase the federal itemized deduction for New York purposes; contains no provision restoring the portion of gambling losses disallowed by IRC § 165(d)
• Tax Law § 615(f)(1) and (2) - reduce the otherwise-allowable New York itemized deduction by up to 25% each (50% combined) for high-income taxpayers, based on how far New York adjusted gross income exceeds specified thresholds
• IRC § 165(d) - limits the deduction for gambling losses to the amount of gambling winnings
• IRC § 67 - imposes a 2%-of-adjusted-gross-income floor on miscellaneous itemized deductions, from which the gambling-loss deduction is exempt
• IRC § 68 - imposes an overall limitation on itemized deductions, from which the gambling-loss deduction is exempt
• IRC § 1341 - "claim of right" relief for income repaid after being reported in a prior year under a mistaken belief of an unrestricted right to it; held inapplicable to gambling winnings and losses

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a96_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-96 (1)
Income Tax
February 20, 1996

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I951031A

On October 31, 1995, a Petition for Advisory Opinion was received from Sam
J. Nole, CPA, 230 Park Avenue, Suite 1512, New York, New York 10169.
The issue raised by Petitioner, Sam J. Nolo, is whether, for purposes of
Article 22 of the Tax Law, gambling losses are fully deductible to the extent of
the gains from gambling transactions consistent with the treatment of gambling
losses for federal income tax purposes under section 165 (d) of the Internal
Revenue Code ("IRC") .
Petitioner presents the following facts. A New York State taxpayer has New
York adjusted gross income of $100,000 or more, and itemizes deductions when
computing New York taxable income. The taxpayer is not a professional gambler,
but has $1,000,000 in reportab!e gambling winnings and has $1,200,000 in total
gambling losses.
For federal income tax purposes, an individual who is not a professional
gambler reports gambling winnings as gross income and reports gambling losses as
“other miscellaneous itemized deductions”. Pursuant to section 165(d) of the
IRC, the deduction for gambling losses is limited to the amount of gambling
winnings. Gambling losses are not subject no the subtraction of two percent of
adjusted gross income that is required by section 67 of the IRC or the overall
limitation on itemized deductions that is contained in section 68 of the IRC.
In this case, for federal income tax purposes, the taxpayer's deduction for
gambling losses is limited to S1,000,000 pursuant to section 165(d) of the IRC,
and is fully deductible pursuant no sections 67 and 68 of the IRC.
Section 612(a) of Article 22 the Tax Law defines New York adjusted gross
income of a resident individual as the individual's federal adjusted gross income
with certain modifications. There are no modifications that affect the inclusion
of gambling winnings in New York adjusted gross income.
Section 615(a) of the Tax Law provides that if the federal taxable income
of a resident individual is determined by itemizing deductions from the
individual's federal adjusted gross income, the individual may elect to deduct
the individual's New York itemized deduction tn lieu of the individual's New York
standard deduction. The New York itemized deduction of a resident individual
means the total amount of the individual's deductions from federal adjusted gross
income (other than federal deductions for personal exemptions) with the
modifications specified in section 615 of the Tax Law, except as provided for
under section 615(f) of the Tax Law.
Section 615(d) of the Tax Law provides for modifications that increase
federal itemized deductions. However, there is no provision in section 615(d)
than allows for an increase in the federal deduction for gambling losses that is
limited to gambling winn'ngs pursuant to section 165(d) of the IRC.
Section 615(f) of the Tax Law provides that the New York itemized deduction
other-wise allowable under section 615 shall be reduced by the sum cf the amounts
determined under section 615(f) (1 and (2), which provide as follows:

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TSB-A-96 (1)
Income Tax
February 20, 1996

(1) An amount equal to the New York itemized deduction otherwise
allowable under [section 615(a) ], multiplied by a percentage, such
percentage to be determined by multiplying ... twenty-five percent,
by a fraction,
(A) in the case of an unmarried individual or married
individual filing a separate return, the numerator of which is the
lesser of fifty thousand dollars or the excess of such individual's
New York adjusted gross income over one hundred thousand dollars and
the denominator of which is fifty thousand dollars;
(B) in the case of a married individual filing a joint return
or a surviving spouse, the numerator of which is the lesser of fifty
thousand dollars or the excess of such individual's New York
adjusted gross income over two hundred thousand dollars and the
denominator of which is fifty thousand dollars;
(C) in the case of a head of household, the numerator cf which
is the lesser of fifty thousand dollars or the excess of such
individual's New York adjusted gross income over one hundred fifty
thousand dollars and the denominator of which is fifty thousand
dollars.
(2) An amount equal to the New York itemized deduction of an
individual otherwise allowable under [section 615(a)], multiplied by
a percentage, such percentage to be determined by multiplying ...
twenty-five percent, by a fraction, the numerator of which is the
lesser of fifty thousand dollars or the excess of such individual's
New York adjusted gross income over four hundred seventy-five
thousand dollars and the denominator of which is fifty thousand
dollars.
As section 615 of the Tax Law indicates, where a taxpayer's New York
adjusted gross income exceeds certain thresholds, the taxpayer's New York
itemized deduction, otherwise allowable, is reduced by a specified amount.
Section 615(f)(1) requires that the New York itemized deduction be reduced by an
amount, the maximum of which is 25 percent, and section 615(f)(2) requires that
the New York itemized deduction be reduced by an amount, the maximum of which is
25 percent, for a total reduction of up to 50 percent of the New York itemized
deduction otherwise allowable.
There is no provision in the Tax Law exempting or otherwise removing
gambling losses from the reduction calculation of section 615(f) of the Tax Law.
Accordingly, the statutory scheme clearly dictates that in this case, the amount
of the New York itemized deduction allowable could be reduced by an amount
equaling up to 50 percent of the allowable deduction. Therefore, the 5!,000,000
deduction for gambling losses allowable as a federal itemized deduction could be
reduced to $500,000 for purposes of computing the allowable New York itemized
deduction of the taxpayer.
Petitioner suggests that provisions regarding "claim of right" income might
apply. Section 1341 of the IRC provides relief for "claim of right" income that
is required to be paid back during the taxable year. "Claim of right" income is
an item that was included in federal gross income for a prior taxable year
because it appeared that the taxpayer had an unrestricted right to such item, and
afterthe close of the prior taxable year it was established that the taxpayer did
not have an unrestricted right to such item. The section 1341 of the IRC claim

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Income Tax
February 20, 1996

of right provision is not related to the gambling winnings and gambling losses
that are at issue in this advisory opinion.

DATED:

February 20, 1996

s/DORIS S. BAUMAN
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.