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Is AI Making Your Accounting Firm More Profitable?

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If you strip out the money pouring into artificial intelligence, the US economy “may have entered recession territory.” That’s the conclusion of the forecasting firm Oxford Economics, and it’s how Blake Oliver opened Episode 510 of The Accounting Podcast with co-host David Leary. Accountants should pay attention, because it means firms aren’t yet capturing the AI boom’s productivity gains that are propping up the economy. AI supercharges individual accountants. But Blake and David argue that firm-level payoff depends on standardizing work, controlling token spend and treating agents like permissioned employees.

The Economy Is Betting on AI ROI

Blake spotted the story on CFO.com. Michael Pearce, chief U.S. economist at Oxford Economics, says, “All the growth in the past couple of years has been in AI. Everything else has been falling.” By Oxford’s math, the economy grew 2% to 2.5% in the first half of the year and should grow north of 3% in the third quarter. But take AI out, and growth is roughly flat, possibly negative.

The irony is hard to miss. Pearce made these remarks at the CFO Leadership Council’s fall conference, where vendors were selling AI-enabled products.

“Have we actually started to make more money for our firms as a result of AI yet?” Blake asked, turning the question on the profession. At Earmark, his AI sales agent helped bring in podcast sponsorships. Overall, though, it added maybe “a few percent” that “could have happened anyway.” His verdict is “We have to see actual productivity gains to justify these billions or trillions of dollars of investment.”

Where AI Already Delivers, One Person at a Time

Some gains are happening. Blake pointed to a Zapier blog profile of Damian Guzman, a solo lawyer who caps himself at about 30 billable hours a week. After rebuilding his practice around Claude, Guzman estimates he gets roughly five times the output. Every hour, Claude scans his Gmail for client requests, creates tasks in Clio, his practice management software, and starts drafting. By the time Guzman opens a request, “roughly half the work is already complete.”

There’s a catch for pricing. Guzman switched to flat rates because, as Blake noted, if he kept billing hourly, “he’d have an 80% revenue decline.” Firms that offer client accounting services (CAS) faced the same challenge years ago.

Blake runs his own scheduled “email sweep.” It reads his inbox, drafts replies in his voice and checks his Google Calendar to suggest meeting times. These tasks work because they don’t need much background. As David put it, you can often reply “based on the context clues in that email.”

The Token Bill Comes Due

The more context an agent needs, the more it costs. Blake trained his system with growing files of operating rules, and every scheduled task reloads them. He’s on Claude’s $100-a-month plan and regularly runs out of tokens halfway through the week. “I’m at $2,500 for October, so I might spend like $3,000 in tokens.”

“We’re burning cash to reply to other AI agents,” David joked. 

Blake weighs that against hiring. Is around $3,000 a month in tokens worth it to avoid a $70,000 to $80,000-a-year hire you’d also have to manage? That’s the math he’s running. But costs keep climbing for a structural reason. “It’s like your memory is erased and you have to go and read everything about that client,” Blake explained. Humans, he noted, consolidate what they learn while they sleep. AI stores context but never truly remembers it, so it rereads everything, every time.

Why Individual AI Doesn’t Scale to the Firm

This is the heart of the problem. Blake says AI “makes individuals with experience so much more productive. But it’s not eliminating any jobs.” Agents still need an experienced human to guide and review the work.

David compared today’s agents to a firm where employees never share knowledge. Each one works heads down, and when a client moves to someone else, it’s like starting over. “The firm-wide AI and the individual AI are completely different,” Blake said, drawing a clear line. That’s why investors get wowed. “The demos are so impressive because they’re not running at scale.”

The fix is old wisdom. When every client runs on a different system and process, onboarding a human takes forever, and the same is true for agents. “The tech isn’t magical in that respect. Not yet anyway.”

Orchestration layers that manage spend and shared knowledge are coming, including Ramp’s Glass and Pilot’s Meridian Starter. David thinks Intuit and Xero probably missed the opportunity while building collection-letter agents: “I need a protective layer before data goes into my GL.”

Private equity may be the proving ground. Platform Accounting Group just raised $355 million. Labor costs often make up 40% to 60% of a firm’s expenses, and Blake argues cutting those costs by even 10% to 20% would lift margins. And as David noted, standardizing small firms on cloud tools could get them partway there with no AI at all.

Treat Agents Like New Hires, Especially Near the Money

Security is the other precondition. Big banks, including JPMorgan Chase, Bank of America and Wells Fargo, restrict third-party AI agents because, David said, they “can’t tell the difference” between authorized agents and rogue ones.

Blake traced the problem to many banks never building multi-user permissions. Business owners already shared a single login with their accountants. Now they share it with agents.

His fix is to give Claude its own limited login, as he did in Xero, with the same access a bookkeeper would get. “We have to think about the AI as just being like another human team member.” Otherwise, David warned, “If you let AI use your login to our systems, now AI has God-mode for all our systems.”

The Payoff Is in the Boring Work

AI’s payoff for firms (and maybe for the economy) depends on unglamorous work like standardizing processes, managing token spend and setting permissions. Firm leaders need ROI, not impressive demos. Listen to Episode 510 for Blake and David’s full discussion, including Stripe’s push toward becoming an accounting operating system.

What Happens to Your Accounting Firm After AI Takes Over Payroll?

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“AI creates capacity, but it does not create demand.” That’s how Echo Zhong, CPA, opens this episode of the Earmark Podcast, and it runs counter to Gusto’s pitch to let software handle payroll so your firm gets its hours back for advisory. Echo sees what happens after the hours come back. Gusto sponsored this episode.

Blake Oliver sat down with Echo at Gusto Next, right after her live demo of Gusto’s new multi-client MCP. She’s been a CPA for more than 15 years and runs Zhong & Sanchez, a full-service boutique firm in Cupertino. It’s across the street from Y Combinator and serves bootstrapped small business owners and VC-backed startups, including many YC companies. By her estimate, her automated workflow saves at least 80% of the time on routine payroll and forecasting updates. But she argues the freed hours don’t fill themselves. Firms have to find the demand, redeploy their people, and win on trust.

Below, we cover what the automation does, where billing goes next, what happened to her payroll manager, and the threat from AI-native startups.

What “AI runs payroll” looks like

This isn’t vaporware. Echo built a scheduled task in Claude that scans the firm’s inboxes and works out which clients sent in hours. It flags anyone who hasn’t, catches new hires who need to be entered, and flags approaching deadlines without the needed info. Then it queues up payroll for approval, which her team can grant in Claude or in Gusto, depending on their comfort level.

The workflow doesn’t stop at payroll. Her team downloads the payroll journal in Excel, and Claude uses it to update the client’s cash flow forecast. For her demo client, that’s a 13-month forecast. The client hired someone new on the same pay and schedule as an existing employee. Claude updated the forecast and called out the new assumptions for review. It doesn’t matter who at the firm runs it, Echo says. “It will just deliver consistent results.”

She’d like to think the workflow saves at least 80% of the time on these updates. A simple update used to take 20 to 30 minutes, longer if someone lost the forwarded email. Scenario analysis could take hours.

The multi-client piece raises the stakes. Blake describes MCPs as the way apps talk to each other. Echo says most MCPs on the market don’t support multiple clients, so each client needs its own connection. With Gusto, one connection covers every client she has access to. “If I’m running payroll for 50 clients… I can just run it one time.” Echo calls it “a pretty big game changer.”

Stop billing for filings, start billing for ownership

Blake pushed further. Gusto also handles state registrations, registered agent services, and annual reports. “This is all work that accounting firms have charged for in the past.”

Echo used to do state registrations manually about ten years ago. Now she points clients to Gusto. But clients still want “a point of contact who’s just owning the job of state registration, state nexus and things like that.” Dealing with the government is still a pain, and her entrepreneurs are “optimizing for peace of mind.” They’d rather offload compliance and not think about it.

So what does she charge for? For startups, her firm acts as a fractional CFO, and the cash flow forecast is “usually just the start of a conversation.” It leads to retirement and exit planning, lending or fundraising for liquidity, and resourcing an expansion. Clients come to her, she says, because they want “a trusted advisor” for the long term, not “a technology solution that’s only probably solving one of your problems.”

Blake wasn’t fully convinced. Charging for advisory “is difficult, at least for a lot of accountants,” he said. Echo’s pricing rule is simple. “If we’re owning the job, then I’m charging for it.” If a client would rather handle it in Gusto themselves, the firm hands over the tools and instructions so they can self-serve.

The payroll manager problem is a change-management problem

None of that happens if the people doing the old work stay stuck in it. “If I were a payroll manager right now,” Blake admitted, “I would be a little worried.”

Echo’s payroll manager was. She was anxious at first and pushed back on the move to Gusto. Echo reframed the conversation. “We’re not trying to get rid of your job, but hey, do you even enjoy doing data entry?” Then she asked where the manager saw herself in three to five years. Once it was clear nobody was being fired, the shift happened “more naturally.” The manager moved into tax advisory work.

Echo is candid that it doesn’t always go this smoothly. It depends on the person and on the trust between owner and staff. Some firms, she suggests, might find it helpful to bring in a change management consultant.

Blake sees a mindset shift underneath all this. In his twenties, the key skill was mastering interfaces like desktop QuickBooks. Now “the hard part is actually imagining a different way of doing the process.”

Echo added a caveat. Firms and software companies still need to work together on the ability to audit results and “the chain of events” behind them.

When startups sell the work, not the tool

The bigger threat may come from outside the firm. Blake laid out a theory he’d read that SaaS sold tools to professionals, but the new AI startups are “actually selling the work.” That now includes tax, accounting, and audit, delivered with “10% of the people or less.”

Echo bets that some people want to work with people, while others would rather self-serve. She’ll serve the first group. Her evidence is that conferences are getting bigger and community events keep popping up. People “will trust a person’s recommendation” even when that person uses software behind the scenes.

She’s not anti-AI, either. She compares her token spending against the cost of hiring. When Blake asked if she’d spend tens of thousands of dollars on tokens, she said that would mean “it’s still saving me an army.”

Capacity is cheap; demand is the job

In Echo’s view, AI will keep creating capacity. If your revenue depends on keying hours and filing state forms, that work is already being automated. As she sees it, what’s left for the firm is finding demand, owning outcomes, and earning trust.

Listen to the full episode for Echo’s demo details and Blake’s self-improving email skill, and earn free CPE while you’re at it.

How to tell whether a client’s tax position has substantial authority

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Donna earns about $300,000 in W-2 wages. Her new short-term rental generated a $120,000 loss after a cost segregation study front-loaded depreciation. She wants that loss to offset her wages.

She’s read IRS publications and blog posts, listened to podcasts, and consulted AI. She’s convinced. Now you have to decide whether her position belongs on the return.

In Tax in Action, Jeremy Wells, EA, CPA, uses Donna’s case to explain what makes a tax position defensible. The answer depends on verified facts and recognized authority rather than the client’s confidence or the odds of an audit.

Useful research isn’t necessarily authority

A source can explain tax law accurately without establishing substantial authority. Jeremy points to Treasury Regulation § 1.6662-4(d)(3)(iii), which provides a closed list of recognized authorities:

  • Enacted statutes and proposed, temporary, and final Treasury regulations
  • Tax treaties and court opinions
  • Revenue rulings and revenue procedures, as well as IRS notices and announcements published in the Internal Revenue Bulletin
  • Congressional committee reports and certain other legislative history
  • Joint Committee on Taxation Blue Books, which explain tax legislation after enactment

By contrast, IRS publications, form instructions, articles, research services, professional advice, podcasts, and AI output are research aids. They may help you find authority, but they do not establish it themselves.

Jeremy applies that rule to his own show: follow the citations and read the underlying sources. That matters especially when AI supplies the summary.

Finding a recognized source is only the start. Next, decide how much it supports your client’s position.

Weigh the authority instead of counting citations

Jeremy distinguishes three standards:

  • More likely than not: Greater than a 50% likelihood that the position would be upheld
  • Substantial authority: Supporting authority is substantial relative to contrary authority
  • Reasonable basis: A lower standard than substantial authority that generally requires sound support from one or more recognized authorities.

“We’re weighing authority. We’re not necessarily counting them,” Jeremy says.

Weight depends on relevance to the facts, persuasive reasoning, the type of authority, and whether it remains good law. You cannot cherry-pick favorable cases and ignore similar cases where taxpayers lost.

These standards measure legal merits, not audit risk. That distinction is crucial because the level of support affects the substantial-understatement penalty.

Disclosure helps, but it has limits

For individuals, an understatement is substantial when it exceeds the greater of $5,000 or 10% of the tax required to be shown. The percentage drops to 5% if the taxpayer claims the section 199A qualified business income deduction.

If the understatement exceeds the applicable threshold, the penalty is generally 20% of the portion of the underpayment attributable to the substantial understatement.

For most positions, two routes can exclude the tax attributable to a disputed item from the understatement calculation:

  1. Substantial authority, without disclosure for this purpose
  2. Reasonable basis plus adequate disclosure of the relevant facts

These rules apply to the substantial understatement penalty. Other grounds for an accuracy-related penalty, such as negligence, are evaluated separately.

Disclosure generally uses Form 8275, or Form 8275-R for positions contrary to Treasury regulations. The IRS also specifies when reporting an item on the return itself is adequate disclosure. For tax years beginning in 2025 and filed on 2025 forms, see Rev. Proc. 2026-12. Tax shelters and certain reportable transactions face stricter rules.

Return preparers face a separate standard under § 6694(a). For most positions, the preparer needs substantial authority if the position is undisclosed, or reasonable basis if it is adequately disclosed. For tax shelters and reportable transactions subject to § 6662A, the preparer must reasonably believe the position is more likely than not to be sustained on its merits.

But disclosure has limits. As Jeremy puts it, “Disclosure can never cure inadequate legal support or substantiation for a position.”

Attaching a form doesn’t replace missing participation evidence or make an unsupported position defensible. Donna’s hours show why.

Donna’s claim turns on 35 hours

Donna’s 15 customer stays averaged six days. Under Temp. Reg. § 1.469-1T(e)(3)(ii)(A), an activity with an average period of customer use of seven days or less falls outside the definition of a rental activity for § 469 purposes. She therefore doesn’t need real estate professional status to potentially treat this loss as nonpassive.

But she still needs to establish material participation.

Under Temp. Reg. § 1.469-5T(a)(3), Donna meets this test if she participates for more than 100 hours during the tax year and participates at least as much as any other individual, including nonowners such as her property manager. Donna reports 145 hours; her property manager reports 115.

At first glance, she passes. Then we examine what she actually did. Her total includes 35 hours reviewing financial reports, analyzing investment returns, and researching tax benefits. Those are investor hours.

Under the rule Jeremy explains, work Donna performs in her capacity as an investor counts toward material participation only if she is directly involved in the activity’s day-to-day management or operations. In this example, Donna isn’t involved in those daily activities. Excluding the 35 hours leaves 110 qualifying hours, which is five fewer than her manager’s 115.

The key fact is her lack of day-to-day involvement, not simply that she hired a manager.

Jeremy already ruled out the other six material participation tests. He concludes that counting those investor hours lacks substantial authority and, in his view, even a reasonable basis. Disclosure can’t solve that problem.

On these facts, Donna’s short-term rental loss is passive and cannot offset her W-2 wages. Any portion of the loss disallowed under § 469 this year generally carries forward to the next tax year.

The research answered the question. Now the practitioner must explain and document the answer.

Build a file that explains your conclusion

Jeremy draws on Circular 230’s diligence framework. Practitioners can generally rely in good faith on information clients provide. If that information appears incorrect, inconsistent with an important fact or assumption, or incomplete, practitioners must make reasonable inquiries.

Use that approach to build a repeatable process:

  1. Establish the relevant facts. Define the issue before researching. In Donna’s case, ask what she did during the 145 hours she reported and what records support the time she spent on each task.
  2. Find the controlling law. Start with the Code and regulations; use research tools to locate relevant rulings and cases.
  3. Read both sides. Compare supporting and contrary authorities with the client’s facts.
  4. Assess support and evidence. Determine whether substantial authority exists or whether reasonable basis and disclosure are available.
  5. Document and advise. Record sources, reasoning, conclusions, and uncertainty. Explain the treatment and potential penalties to the client.

For Donna, that means explaining why the 35 hours don’t count and why the loss can’t receive the proposed nonpassive treatment. Offer to prepare the return using the passive-loss treatment. If Donna insists on treating the loss as nonpassive on these facts, decline to prepare or sign a return that takes that position.

Your answer should rest on the law and facts, not on whether you expect an audit.

Listen to Tax in Action, episode 39 to hear Jeremy work through Donna’s case and explain how to weigh the authorities that support and cut against a return position.

Section 225 doesn’t make overtime tax-free

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“They say politicians campaign in poetry, but they govern in prose.” Jeremy Wells, EA, CPA, opens Episode 37 of Tax in Action with that line, and it frames the new overtime deduction well.

“No tax on overtime” is the poetry. IRC Section 225 is the prose.

Overtime isn’t exempt from tax. For tax years 2025 through 2028, eligible taxpayers may deduct a limited portion of qualified overtime compensation. The deduction requires a Social Security number (SSN) and comes with income limits, filing-status rules, and strict reporting criteria. Here is what tax professionals need to know.

“No tax” is really a limited deduction

Qualified overtime compensation is still part of gross income and subject to federal income tax withholding, Social Security and Medicare taxes, federal unemployment tax, and applicable state taxes.

But Section 225 created a temporary deduction on Schedule 1-A. Clients can claim it whether they itemize or take the standard deduction, but it doesn’t reduce adjusted gross income.

The main limits are:

  • $12,500 for single and head-of-household filers
  • $25,000 for married couples filing jointly
  • A reduction of $100 for each full $1,000 of modified AGI above $150,000, or $300,000 for joint filers
  • No inflation adjustment or carryforward for unused amounts
  • No deduction for married filing separately
  • An SSN valid for employment, issued before the return’s due date (including extensions), for each person whose overtime supports the deduction; an ITIN doesn’t qualify.

For this purpose, modified AGI adds back income excluded under Sections 911, 931, and 933. The income phaseout applies after the filing-status cap.

But before applying those limits, we must identify the qualifying compensation.

The tax answer starts with federal labor law

Qualified overtime compensation is the amount required under Section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate. For a covered, nonexempt employee, the FLSA generally requires time-and-a-half pay for hours over 40 in a workweek.

Under the usual time-and-a-half calculation, only the extra half-time premium qualifies. The employee’s regular wages for those hours don’t. Special rules apply to certain employees whose overtime is calculated under alternative provisions of FLSA Section 7.

Under the usual FLSA rules, each workweek stands alone. If an employee works 30 hours one week, 50 the next, and 35 the third, the employer can’t average the weeks. The 10 hours above 40 in the second week create the overtime obligation.

Voluntary premiums and amounts required only by state or local law don’t qualify beyond the federal minimum. Qualified tips, as defined in Section 224(d), are excluded from qualified overtime compensation, whether or not the taxpayer claims the tips deduction.

FLSA coverage is also a facts-and-circumstances question. Common exemptions include certain executive, administrative, professional, outside-sales, and computer roles. If an employee disputes their classification, refer the client to an employment attorney or HR professional. Our role is to understand the tax treatment and check the reporting.

Payroll labels can hide the qualifying amount

Jeremy’s examples involving an employee named Eve show why we can’t rely on the word “overtime” alone. Assume Eve is eligible for FLSA overtime, all listed amounts relate to hours subject to the usual federal overtime requirement, and the pay multiples use her FLSA regular rate. Under those assumptions, each record produces the same $5,000 qualifying amount:

  • $5,000 labeled as the FLSA overtime premium: Use $5,000
  • $15,000 of total time-and-a-half pay: Divide by three. Only $5,000 is the half-time premium.
  • $10,000 described as the premium above regular pay under a double-time plan: Divide by two
  • $20,000 of total double-time compensation: Divide by four

The FLSA regular rate isn’t necessarily the employee’s base hourly wage. It generally includes nondiscretionary bonuses, commissions, and other compensation unless a statutory exclusion applies. Employers and payroll providers don’t always use these terms consistently. Confirm whether the number represents total overtime pay, the full premium above regular wages, or the FLSA half-time premium.

Separate reporting becomes mandatory with tax year 2026

Because the law passed mid-2025, the IRS offered transition relief for that year only. Employers were encouraged, but not required, to identify qualified overtime separately. Employees could use pay stubs, Form W-2 Box 14, or one of the reasonable methods in Notice 2025-69.

For 2026, employers must report qualified overtime on Form W-2, Box 12, Code TT. A pay stub or Box 14 entry isn’t enough. In rare cases involving a worker treated as an independent contractor for income tax purposes but as an employee under labor law, the amount may appear in Form 1099-NEC Box 1d or Form 1099-MISC Box 14.

If an employer reports too little, the taxpayer must request Form W-2c. If the employer won’t provide a correction, the taxpayer cannot use the omitted amount to calculate the deduction. Form 4852 cannot substitute for employer reporting for this purpose. If the employer reports too much, the taxpayer still can’t deduct more than the qualifying overtime actually paid.

That makes payroll review an essential part of tax preparation.

The final deduction may be smaller than clients expect

The calculation follows three steps: determine qualified overtime compensation, apply the filing-status cap, and then apply the modified-AGI phaseout.

Jeremy’s examples show the result:

  • A single taxpayer with $15,000 of qualified overtime and $75,000 of modified AGI may deduct $12,500
  • At $175,000 of modified AGI, the same taxpayer’s deduction falls to $10,000
  • Joint filers with $15,000 of qualified overtime and $250,000 of modified AGI may deduct the full $15,000
  • At $450,000 of modified AGI, the phaseout reduces that couple’s deduction to zero

Because the deduction doesn’t reduce AGI, it doesn’t change premium tax credit calculations, IRMAA, taxable Social Security, net investment income tax thresholds, or other AGI-based provisions. It also doesn’t reduce FICA or self-employment tax. However, because it reduces taxable income, it can affect the qualified business income deduction’s taxable income limitation and thresholds.

Replace the slogan with a review process

Section 225 is a narrow, temporary deduction, not tax-free overtime. For each affected client:

  • Identify the FLSA-required half-time premium
  • Check filing status, modified AGI, and SSN eligibility
  • Reconcile payroll records with Form W-2, Box 12, Code TT
  • Request a corrected form when the reporting is wrong
  • Explain what the deduction will and will not change

Political slogans are memorable. Our job is to translate them into the numbers that go on the return. For Jeremy’s complete walkthrough, listen to Episode 37 of Tax in Action.

Your client lost it all at the casino, so why do they still owe tax?

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Your client hands you a Form W-2G showing $75,000 of slot winnings. “I lost all of it,” the client says, “so there shouldn’t be anything to report, right?”

Jeremy Wells, EA, CPA, recently encountered a similar case at his firm. As the conversation unfolded, the client’s combined wins and losses potentially reached hundreds of thousands, possibly even millions, of dollars. So what belongs on the return? The $75,000, the full activity, or nothing?

In this episode of Tax in Action, Jeremy explains why the answer starts with the activity rather than the paperwork. Starting in 2026, even breaking even can produce taxable income.

Start with the wager, not the payout

Before calculating losses, determine whether the client’s income came from wagering. Neither Section 165(d) nor its regulations define a wager. Jeremy draws on the courts’ approach, which defines a wager as something of value placed at risk, with an uncertain outcome and a possible prize or return.

Skill doesn’t automatically rule out wagering, nor does an entry fee automatically establish it. Ask what the payment purchased. Was it access to a competition, or a stake in an uncertain outcome?

A paid raffle is a wager. A free promotional drawing isn’t, because the participant risks nothing. The prize is generally taxable under Section 61, but it doesn’t count as wagering gains that you can offset with gambling losses.

The stake also establishes basis. Bet $100 against a friend’s $100 on a coin flip and win the $200 pot. Your gain is $100, not $200. If you lose, your loss is the $100 wager.

Next, we need to decide how to measure that activity.

Measure sessions without netting the year

For slot play, courts and the IRS support session accounting rather than tracking every lever pull. Compare the amount available when the session ends with the amount brought into it. For example, if you start with $100 and leave with $200, you have a $100 gain. If you lose the entire stake, you have a $100 loss.

Jeremy cautions that this authority is strongest for slots. Don’t assume the same accounting unit fits poker, sports betting, or other activities.

“Session accounting isn’t annual netting,” he emphasizes. Consider three sessions:

  • Session one: $1,000 gain
  • Session two: $700 loss
  • Session three: $200 gain

Report $1,200 of gains and calculate the deduction from $700 of losses. Don’t report $500 of annual net income. For a casual gambler who itemizes in 2026, the loss deduction is $630 (90% of $700).

Those separate totals drive the new tax result.

The 2026 limit creates income without profit

Before 2026, Section 165(d) generally limited deductible wagering losses to wagering gains. The One Big Beautiful Bill Act adds another restriction starting in 2026, since deductible wagering losses equal the lesser of 90% of wagering losses or wagering gains.

Congress is considering legislation that would remove the 90% restriction retroactively for 2026. The examples below apply the law currently in effect; check for legislative changes before preparing returns.

For a casual gambler who itemizes:

  • Gains: $100,000
  • Losses: $100,000
  • Permitted loss deduction: $90,000
  • Taxable income remaining: $10,000

The client broke even financially, but not for tax purposes.

Joint filers combine both spouses’ gains and both spouses’ losses, keeping the totals separate before applying the limit. Taking the standard deduction means a casual gambler can’t deduct any losses. Some states don’t allow a wagering-loss deduction, and high-income taxpayers may face a further reduction in itemized deductions under amended Section 68.

Casual gamblers report gains on Schedule 1 and permitted losses on Schedule A. The gains increase adjusted gross income (AGI), but losses don’t reduce it. That mismatch can increase taxable Social Security, reduce income-based credits and deductions, and increase Medicare income-related premiums. Although casual gambling winnings generally aren’t net investment income, they increase MAGI and can expose more of the taxpayer’s other investment income to the net investment income tax. Jeremy flags the Medicare issue because many gamblers are retirees.

Professional gamblers use Schedule C, but that doesn’t remove the limit. Wagering losses and otherwise allowable wagering-related business expenses are still subject to Section 165(d). The law makes that expense treatment permanent and adds the 90% restriction. Professionals also pay self-employment tax on net earnings.

Professional status depends on regular, ongoing activity pursued for income or profit, not the client’s chosen label.

Reliable records must support the totals no matter which reporting path applies.

A W-2G tells only part of the story

A W-2G reports certain gambling winnings, not a complete accounting of the client’s activity. Depending on the type of gambling, the reported amount may already subtract the winning wager. Determine whether it includes any return of the client’s stake, then reconcile it with the records supporting the wagering or session result.

Jeremy shared an example. A client receives a W-2G for a $2,000 slot jackpot, starts the session with $500, and leaves with $1,600. Assuming the client added no funds and withdrew no winnings during play, the session gain is $1,100: the $1,600 remaining minus the $500 starting amount.

Ask for records instead of simply accepting the client’s explanation.

The reverse also happens. Smaller wins, sports bets that fail the 300-to-1 reporting test, cash play, and foreign or online activity can produce taxable gains without a W-2G. As Jeremy says, “These are information reporting thresholds. They aren’t income exclusion thresholds.”

So the preparation process must reach beyond the forms.

Build a return you can explain

Use Jeremy’s workflow to turn scattered paperwork into supported totals:

  • Identify all activity: Ask about every casino, sportsbook, app, and type of gambling
  • Gather the records: Collect W-2Gs, payer statements, and wager, session, and account histories
  • Separate gains and losses: Use the appropriate accounting unit, then apply the deduction limit
  • Reconcile the forms: Report the proper gain, claim reported withholding, and retain a form-by-form, session-by-session reconciliation. Consider attaching an explanatory statement.

Under Revenue Procedure 77-29, clients should log dates, activities, establishment names and locations, companions, and amounts wagered, won, and lost. Bank records, ATM records, player histories, and travel records supplement that log. Annual casino win-loss statements rarely provide the session detail needed.

“I lost it all” isn’t a reporting method. Establish basis, separate winning and losing results, and reconcile before applying the 90% limit. Educate clients now so their records can support the return later.

Listen to Jeremy explain the calculations and preparation workflow in Episode 38 of Tax in Action.