In one weekend in January, a combined billion-dollar jackpot from the Powerball and Mega Millions lotteries was doled out to two individual winners. Among the many players out there, one often wonders whether purchases of lottery tickets translate into deductions.
I receive emails from accountants on how to craft responses to questions from clients. In this Q&A column, we’ll go over lottery ticket expenses, interest from bank savings, and personal deductions.
These questions edited and condensed for clarity and brevity.
Question: Am I allowed to include the cost of lottery tickets with my itemized deductions for state and local taxes or charitable contributions?
Answer: No. IRS rules for gambling losses apply to lottery tickets. The cost of those tickets can be taken as an itemized deduction to offset any kind of gambling winnings -- lotteries, horse racing, cards, et cetera. But if there are no winnings, there‘s no deduction.
Q: My sister and I formed a partnership. The partnership’s main asset is a building that leased space to an architect last year. Subsequently, the architect decided to make substantial improvements to her office. Does our partnership have to declare the value of these improvements as part of its rental income?
A: No, as long as the improvements aren’t a substitute for regular rental payments. But IRS regulations prohibit landlords from claiming any depreciation deductions for improvements that are paid for by tenants.
Q: I keep my savings at a bank that credited interest of $900 to my account in December 2017. But it wasn’t until January of 2018 that I took the passbook to the bank, which then entered the interest. Am I supposed to show the interest on my 1040 form for 2017 or 2018?
A: Report the $900 on your return for 2017. The entire $900 was included in the Form 1099 for 2017 that you received from the bank.
Q: Two weeks ago, I finally decided to play our state lottery, which turned out to be a savvy move, as I won $75,000. As of now, I expect to be in a much lower tax bracket next year. Suppose I wait until the start of next year to cash my ticket. That strategy would significantly cut the IRS's share. Will the IRS go along with my maneuver?
A: Absolutely not. Because the money’s yours for the asking, you must report all of it on a return for this year. It makes no difference you hold off until next year to collect your prize.
Q: My employer has given me an expenses-paid vacation to New York City next January as an award for reaching my sales goals. How will this affect my income taxes?
A: You’re liable for taxes on rewards and bonuses, including vacation trips paid to you for outstanding work. If such an award is payable at some future time at the option of your employer, it isn’t taxable until you receive it or your employer makes it available to you.
Q: Under what circumstances am I allowed to deduct personal property taxes on my return for 2017?
A: Only if you forego the standard deduction and itemize on Schedule A of Form 1040. In that case, a personal property tax may be deducted, provided it meets the following three conditions: 1) The tax must be based on the value of the personal property; 2) the tax must be imposed on an annual basis; 3) the tax must be imposed on personal property.
Q: is it possible to take an itemized deduction on 2017’s Schedule A for water and sewer taxes, just the same as for real estate taxes?
A: No. Generally, water and sewer taxes are nondeductible personal expenses.
Q: Does the law permit me to deduct Social Security taxes withheld from my wages?
A: These taxes are never deductible.
Q: I signed for lessons with a Chicago dance studio and paid in advance. Then I moved to California. What about a deduction for the unused lessons?
A: The IRS forbids any kind of write-off for personal expenses of this type.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting).
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes...