Financial Cause and Effect

As a site coordinator and quality reviewer at a local Volunteer Tax Assistance site, I am able to see hundreds of real-life examples of “cause and effect”. 

  • What EFFECT will cashing out my 401k have on my taxable income? It may CAUSE a portion of your Social Security taxable.
  • What EFFECT will $24,000 of income (with no withholdings) have on a 19 year-old full-time student living at home? The EFFECT will be felt by the student who will owe taxes and by the parents who will not be able to claim the child as a dependent.

The most recent unpleasant EFFECT was CAUSED by gambling winnings.  A very lucky woman in her 70’s received a W-G from a local casino, indicating she won $20,800 worth of winnings with NO taxes withheld. Going on can help one have better and a lot more fun gambling. The fact that no taxes were withheld did not bother her because she also had documentation showing her losses, which far exceeded her winnings. She knew that her losses could be deducted from her winnings. What she did not understand was…

  • She could only write-off the losses that were equal to her winnings…meaning…of the 25,000 of losses she had incurred trying to win the $20,800, she could only write off 20,800.
  • What she also did not know was…The losses are reported on a schedule A, while the winnings are counted as income. Once the winnings were added to her pension income and the $26,418 of social security income, she discovered that, not only had the winnings pushed her into a higher tax bracket, her income now was high enough that $13,661 of her Social Security was now taxable. Last year, with no gambling winnings, none of her Social Security was taxed.
  • It was only after her total income was calculated that she could subtract her itemized deductions (which included her gambling losses). 

The combination of increased income (due to gambling winnings), plus the increased tax bracket, plus the increase in the taxable portion of her social security, and the fact that there were no tax withholding on the gambling winnings; this woman owed more than $2000 for her federal tax return…something she had not anticipated.

Before doing anything different with your money, it is important to stop and consider what effect it will have on your tax return.

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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