Notice: New Tax Treatment Of Wagering Losses For Casual Gamblers Under The Michigan Income Tax Act
Date: January 13, 2022
On December 29, 2021, Public Act 168 (PA 168) was signed into law amending the Michigan Income Tax Act (MITA) to create a new individual income tax deduction for wagering losses sustained by casual gamblers. This notice describes the new deduction, which applies to tax years 2021 and after.
Background: The determination of Michigan taxable income begins with federal adjusted gross income (AGI) and includes all wagering gains for both professional and casual gamblers. The manner in which wagering losses are reported at the federal level by professional and casual gamblers differs. Professional gamblers report losses on Schedule C, Profit or Loss from Business, which allows the loss to be incorporated into AGI. In contrast, casual gamblers report wagering losses, if at all, as an itemized deduction on Schedule A. Itemized deductions are not a component of AGI. Since Michigan's starting point for determining taxable income is AGI and since Michigan law did not permit deduction of wagering losses prior to PA 168, only professional gamblers' losses were a component of Michigan taxable income.
2021 PA 168: PA 168 amends Part 1 of the MITA, specifically section 30, which defines the individual income tax base, to create a new individual income tax deduction for wagering losses sustained by casual gamblers, effective for tax years beginning in 2021. The deduction is equal to the wagering losses claimed by the taxpayer as an itemized deduction on the federal income tax return for the same tax year. Thus, a casual gambler may only use this new deduction if the taxpayer elected to itemize deductions on the federal income tax return rather than take the standard deduction. As before, a gambler can only use wagering losses to reduce gambling winnings and cannot reduce taxable gambling winnings below zero.
For nonresidents, only wagering losses attributable to wagering transactions placed at or through a casino or licensed race meeting located in Michigan may be deducted and only to the extent the gains on those transactions are allocated to Michigan under Section 110(2)(d) of the MITA.
PA 168 amends only the MITA and affects only the calculation of state income tax liability. It does not amend the City Income Tax Act, MCL 141.601 et. seq. or affect the calculation of city income tax liability.