Tax Attic: Approved Income Taxing

For the last several years, representatives of the Michigan Chapter of the National Association of Tax Professionals (MI-NATP) have met with the Michigan Income Tax Administrators (MITA) early in December to discuss the coming tax season.This year’s meeting was hosted by the City of Jackson. MITA members are the individuals who are responsible for the 24 city income tax departments spread through-out the Lower Peninsula of Michigan. Currently, there are no cities in the UP with an income tax. Last year, Benton Harbor added an income tax to begin in 2018 and this year, East Lansing’s residents approved an income tax beginning in 2019. In this area, Grand Rapids, Walker, Portland, Big Rapids, Muskegon, Muskegon Heights, Lansing and Ionia have a city income tax. The rules are basically the same for all City taxing entities but they do have some interpreting leeway. For example, most cities, including Walker and Grand Rapids, allow $600 for each exemption but Portland allows $1,000 and Ionia allows $700. All cities allow an extra exemption for being 65 or older except for Big Rapids. All cities, except for Jackson and Big Rapids, allow an extra exemption for blind taxpayers. There are many, many more examples of different cities having slightly different rules. At this meeting, the Tax Administrators get the chance to clarify issues they might have with tax professionals and, in return, we get to ask for clarifications of any issues and questions we might have. Over the years, this has been a very productive meeting for our MI-NATP membership and I believe for MITA’s membership as well. This year, MITA emphasized reporting a taxpayer’s actual work location on returns.  That’s important because, especially here in West Michigan, there can be addresses that match almost exactly with others.  There may be an address in Walker, Grand Rapids, Grand Rapids Township, Grandville and Wyoming that vary only by a SE, NW, NE or SW designation.  Preparing a proper tax return for Walker and/or Grand Rapids involves having the correct working location. Walker also passed on the information that it will begin accepting returns via the e-file process.  Now that is very welcome news. Many of Action Tax Service’s clients work or live in Walker and e-filing should allow both us and Walker to be more efficient in processing returns. MI-NATP passes on the notes from our meeting to all of our membership so hopefully all of our tax professionals will prepare more accurate returns for all of the MITA members.

Many federal topics that changed this year also affect city returns.  These changes were discussed during the meeting.  Allow me to analyze how one change, the treatment of gambling winnings and losses, can affect City returns.  The Tax Cuts and Job Act (TCJA) eliminated the section of Schedule A where gambling losses were deducted. The occasional gambler who won a pot and received a W2G also kept track of his gambling expenditures through-out the year and deducted those losses up to the W2G winnings on the Sch. A. That portion of Schedule A was eliminated so the gambling deduction is also entirely eliminated.  This change doesn’t directly affect city returns because they didn’t allow the Schedule A offset anyway. Winnings were taxable on the City returns but losses were not deductible.  However, now City returns may be affected by what gamblers can do to get a deduction for their losses. The term “session winnings and losses” in conjunction with gambling will become more important.  There have been court cases and, in addition, the IRS has also ruled positively that if a gambler keeps track of winnings and losses every time the gambler goes into and then leaves a casino, he is allowed to report winnings and losses from those sessions on a net basis on page 1 as “other income” on the federal return.  In other words, by using the session method, the gambler will get a page 1 deduction for his losses. By virtue of being able to report the session on page 1, the gambler is circumventing using Schedule A and also gets a deduction from Michigan income and also City income.  For example, the gambler walks into the casino at 9pm with $500 and leaves at 3am with $700.  This lucky gambler actually made a net profit of $200 during the session. However, there is more to the story than just winning $200.  According to a report he can get from the casino, he actually had winnings totaling $18,600 but he also had losses of $18,400 during the entire session from 9pm to 3am.  If he keeps track of these “session winnings and losses”, he would report the full $18,600 but also deduct the full $18,400 on page 1 of his federal return.  In effect, only the net figure of $200 ($18,600-18,400) is taxable to the IRS, now Michigan and the applicable City.  The taxpayer is able to get a deduction for his losses on the federal return, the Michigan return and the City return using this session winnings and losses procedure.  If he didn’t use the session winnings and losses procedure, he would pay federal, Michigan and City  tax on the full $18,600 because the $18,400 would not be deductible.  Let’s say his taxable contribution to Washington, Lansing and the applicable City would be much higher.  The taxpayer has to be consistent in using the session procedure.  There is no picking and choosing which sessions to report and which ones not to report.  He has to report all of his winnings and losses for the entire year.  If you can tell this gets a little bit complicated, you would be correct.  I would tell any taxpayer contemplating using this procedure to contact a tax professional before proceeding.  This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at www.actiontaxservice.com