Ky. Senate committee advances bill to restore gambling loss deduction

A Kentucky Senate committee on Friday passed a bill that would restore a provision of the tax code that allows residents to deduct their gambling losses from their gambling winnings on their state tax returns.

The provision is part of a larger tax bill that Republicans in the state legislature are crafting to fix dozens of what they have called “unintended consequences” of a tax bill passed hastily last year. That tax bill disallowed any deductions on state tax returns that were contained in the 165 part of the federal tax code, a list that includes gambling winnings. As a result, Kentucky taxpayers will not be allowed to deduct their losses against their winnings this year, in contrast to any other prior years.

Damon Thayer, the Kentucky Senate majority leader, who has ties to the racing industry, requested that the language restoring the deduction be added to the bill. He said earlier in the week that he had been unaware that last year’s bill did away with the deduction until reading an article in a trade publication, The Blood-Horse, about the impact of last year’s tax bill.

The House, which, like the Senate, is controlled by Republicans, has already passed its own version of the clean-up bill, meaning that the two bills will have to be reconciled in conference committee if one is ultimately to be sent to Gov. Matt Bevin for his signature. Bevin is a Republican.

The elimination of the gambling-loss deduction in Kentucky occurred just months after the IRS and Treasury Department changed federal reporting and withholding requirements for pari-mutuel winnings. The changes, which went into effect in the fall of 2017, resulted in an 89 percent decline in the number of winning pari-mutuel tickets reported to the IRS for tax purposes in the first year in which the change was in effect.

As a result of the federal tax changes, many horseplayers will not have reportable winnings this year or will have vastly lower amounts of reportable winnings, so the impact of the Kentucky tax law this year is expected to be limited. Still, representatives of the state’s racetracks and the National Thoroughbred Racing Association, an industry organization that conducts lobbying, banded together earlier this year to drive support for the change and provide language to the state legislature for restoring the deduction.

Under the current tax law, residents will have to pay a 5 percent tax on all reportable winnings. In addition to horse racing, the law will also apply to lottery winners and customers of the state’s handful of casinos, which operate devices similar to slot machines.