He Will Finish 2026 With $50,000 in Gambling Winnings and $50,000 in Losses. The New Tax Rule Will Still Leave $5,000 of His Winnings Taxable

Picture a retiree who instead of playing the stock market plays the tables. He ends 2026 with $50,000 in gambling winnings and $50,000 in gambling losses. He came out even for the year. His federal tax return will show something different.

Starting in 2026, he can deduct only 90% of his gambling losses, and the deduction can’t exceed his winnings. On $50,000 of losses, $45,000 is deductible. That leaves $5,000 of winnings with no deduction to offset them. The $5,000 is taxable income, and what he actually owes on it depends on his tax bracket.

If he collects Social Security, the $5,000 becomes the smaller problem.

How Breaking Even Still Leaves Taxable Income

1. Reported winnings: $50,000. All of it goes on his return as income, whether or not the casino sent him a tax form.
2. Documented losses: $50,000. Losses count only if he can prove them with a gambling diary, account statements, tickets or receipts.
3. Deductible amount: $45,000. This stems from the 2025 tax law’s change to Section 165(d). That section of the tax code governs gambling losses.
4. Left over: $5,000. It is taxed as ordinary income alongside his pension, IRA withdrawals and anything else he earns.

Before 2026, losses could be deducted up to the full amount of winnings, but the new cap removes the last 10% of the deduction.

This assumes he itemizes. A casual gambler claims losses on Schedule A as an itemized deduction. If he takes the standard deduction instead, which is $16,100 for single filers in 2026, he gets no gambling-loss deduction. Since $45,000 in losses tops the standard deduction, this example is the best scenario.

Why His Winnings Can Make Social Security Taxable

Many retirees miss this. Winnings go into adjusted gross income (AGI) on Form 1040. Losses are subtracted later, on Schedule A. Whether benefits get taxed is decided before losses come off.

The IRS looks at what it calls combined income: AGI, plus tax-free interest, plus half of your benefits. A single filer sees up to 50% of benefits become taxable once combined income passes $25,000, and up to 85% once it passes $34,000. For married couples filing jointly, tax starts at $32,000.

He receives $2,000 a month, or $24,000 a year, and has no other income. His combined income is $12,000, well below the threshold, so none of his benefits are taxed.

Add the $50,000 in winnings and his combined income rises to $62,000. Now $20,400 of his benefits is taxable, which is the 85% maximum. His $45,000 loss deduction comes too late in the calculation to change that.

After the $45,000 itemized loss deduction, about $25,400 of taxable income remains on a return that otherwise would have shown almost none. Most of that comes from benefits, not from the new cap.

Congress May Undo the Cap Before Filing Season

On September 16, the U.S. House Ways and Means Committee passed H.R. 10357, the Digital Asset Tax Certainty Act, by a 38-5 vote. The bill would restore the old rule allowing losses to offset winnings dollar for dollar. It would apply to tax years beginning after December 31, 2025. It is making its way through the legislative ranks but still needs full House and Senate approval.

Even if the full deduction comes back, the Social Security problem would remain, since losses would still come off on Schedule A, after combined income has already been figured.

Two Things to Get Right Before Filing a 2026 Return

1. First, keep records for both sides. He can’t simply tell the IRS he lost as much as he won. A diary with dates, places and amounts, along with statements, tickets and receipts, backs up losses. A casino’s year-end statement helps but may not cover everything, especially across multiple venues or online platforms.
2. Second, the Social Security effect is hardest to fix after the fact, driven by total winnings. The loss deduction can’t reverse it. Retirees collecting benefits should understand this risk. Large winnings can make a large share of Social Security taxable, even in a break-even year.

State taxes and filing status, plus other income, can all change these numbers. Having a tax preparer run his actual figures, once Congress decides the 90% rule, is money well spent.

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