Original Article by Howard McEwen | ENQUIRER CONTRIBUTOR (updated January 20, 2020)
CINCINNATI – This tax season, winning gamblers are learning that they might be able to beat the odds at the sportsbook or the casino, but the IRS is still holding all the cards.
Jennifer Gatherwright and Jessica Craven, attorneys with Gatherwright, Freeman and Associates Law Firm, work with clients in Cincinnati and Northern Kentucky who learn this the hard way. Craven said a wide range of problems can arise from winning – from being overtaxed, losing tax deductions and exemptions, to a loss of Social Security and Medicaid benefits. “Planning and record keeping are everything with tax issues and this includes gambling matters,” said Craven who once worked for the IRS. “For gamblers who collect Social Security, their winnings may trigger taxes on their monthly checks. The IRS taxes married Social Security recipients who have benefits with an annual gross income above $32,000. [1] Those on Medicaid have a harder challenge, as those benefits are means tested every year. A lucky night at the boats may artificially inflate their income, even if they have gambling losses, and could cause their benefits to be phased down or be taxable. In addition, any taxpayer who does not keep accurate records may incur net gambling losses, but still owe big bucks to the IRS.”
According to the 2019 American Gaming Association’s Annual Survey of the Commercial Casino Industry, the casino industry enjoyed another record-setting year, with nationwide consumer spending on casino gaming reaching a highest-ever $41.68 billion. [2] Cincinnati, Ohio maintained its ranking as one of the top 20 largest casino markets in the country. You can bet your bottom dollar the government is keeping tabs on all that money. [3]
In addition to visiting the casinos, modern players are gambling online and it’s perfectly legal, (mostly). There are no specific laws for or against online gambling in Ohio or Kentucky. However, many people are doing it and the states are going to have a difficult time prohibiting or regulating individual players. States like New Jersey, West Virginia, Pennsylvania, and Indiana have passed legislation that specifically legalizes certain kinds of online gambling and sportsbooks, so chances are if you’re betting online the company you are betting with is located either in one of these states or outside the United States. Individuals from all over the United States are gambling through these websites.
The mobile betting industry has exploded since 2018 when the Supreme Court ruled in Murphy v. National Collegiate Athletic Association that the Professional and Amateur Sports Protection Act, which prohibited states from authorizing sports gambling was unconstitutional. In his opinion for the majority, Justice Alito wrote that allowing the federal government to prohibit state legislators from voting on online gambling within their own states was a direct affront to state sovereignty. [4] Of course the Tax Code is still legally intact, and odds are the IRS is tracking your gambling winnings and wants to collect its fair share.
“If you’re one of those who use mobile gaming or the local casinos as a source of entertainment, hoping to win the big bucks in an online Super Bowl bet or mega-jackpot at the quarter slot machines, you should also be aware of the tax consequences,” said Craven. Craven said the first problem is with how the IRS defines income.
“The term ‘income’ includes all gambling winnings and online gambling winnings,” said Craven. “Individuals are not allowed to report only their net winnings. Wins and losses are separately reported and the losses are only allowed to the extent of winnings. Gamblers are taxed on net winnings but can’t deduct net losses. Winnings are included in income on the first page of a tax return, but gambling losses are part of itemized deductions. In a stroke of luck for gamblers, in passing the Tax Cuts and Jobs Act in December 2017 Congress retained the itemized deduction for gambling losses to the extent of winnings even though it did away with other miscellaneous itemized deductions that are subject to the 2% floor.”
“The bad news is that if gamblers don’t itemize, they don’t get to deduct any losses. The Tax Cuts and Jobs Act increased the standard deduction amounts to $12,000 for singles and $24,000 for married filing joint couples, so less Americans than ever are itemizing. [5] The Tax Foundation (United States’ leading tax policy nonprofit) estimates that the number of taxpayers itemizing prior to the Tax Cuts and Jobs Act was about 30% and has dropped to about 13% subsequent to the passage of the Act. If you don’t itemize, you won’t get the benefit of gambling deductions,” said Craven. “Consider this example – if you win $5,000 gambling, but lose $4,000, and you claim the standard deduction because you don’t have enough expenses to itemize then you can’t reduce your gambling income by your gambling losses and, therefore, will have to pay income taxes on the whole $5,000 even though your net gambling income was only $1,000. And if you happen to have a bad year, you cannot just deduct your losses without reporting any winnings.
Another major problem is the IRS record-keeping requirements.
“It is conceivable,” said Gatherwright, “for an unwitting gambler to win $100,000 one night, lose it all the next night and owe taxes at the end of the year on the $100,000 winnings because they did not keep accurate records. When gamblers win over $1,200, the casino issues them a W-2G, which reports the earnings to the IRS. When gamblers lose, they – not the casino – are responsible for keeping the records to the IRS’ liking.”
Keeping those records isn’t so easy for players to do.
“Guidance on the kinds of records the IRS expects you to maintain is provided in a longstanding procedure published as Rev. Proc. 77-29, counseling taxpayers to maintain an accurate diary identifying the date and type of wagering activities, the name of the gambling establishment, the address of that establishment, the names of those who accompany you to the establishment, and the amounts won or lost. [6]
How to prove gambling losses? “Believe it or not, it requires that a gambling diary must be kept to encompass each spin of the roulette wheel and each hand dealt at the blackjack table.”
Slot players may have it a bit easier. Players’ cards – cards inserted into slot machines to record a player’s bets and allocate free gifts known as comps – automatically track a gambler’s wins and losses. They simply have to ask the casino for a report.
“If you don’t use a player’s card to substantiate your losses at the casino, you may be ‘shooting craps’ when it is time to offset your winnings with losses,” said Gatherwright.
So what about the increasingly popular online sportsbook winnings? Gatherwright said, “Most legitimate wagering websites are IRS compliant. The IRS rule on when to issue a W-2G is as follows: If a wager pays more than $600 at odds of 300 to 1 or greater, the sportsbook is required to mail an IRS form W-2G to the customer for each qualifying wager. The IRS and the customer’s state of residence will each receive a copy of the W-2G as well.”
Mobile wagering companies are also supposed to withhold and remit taxes to the IRS on your winnings under certain circumstances said Gatherwright. “When a wager pays out $5,000 or more with odds of 300 to 1, the online wagering companies are required to withhold and remit 25% of your total payout the IRS under your name.” [7]
Consider this example, if you make a $200 bet and the bet pays $5,500, the sportsbook is not required to issue you a W-2G or withhold any funds for the IRS. This is because while $5,500 does fulfill the requirement of payout higher than $600 or $5,000, it does not fulfill the requirement of odds greater than 300-1, based on the $200 wagered.
Is there any way to avoid the government getting a piece of your action? “Not legally,” said Gatherwright. “It’s the price you pay to play. There are some players who gamble with offshore gambling websites and offshore bank accounts to avoid taxes, but that has serious criminal implications and is just not worth the risk no matter what the odds may be.”
If you have a question about IRS gambling winnings, please give us a call.
Endnotes
1. Taxation of Social Security Benefits; see https://www.irs.gov/publications/p915
2. See the full State of the States 2019 THE AGA SURVEY OF THE COMMERCIAL CASINO INDUSTRY at https://www.americangaming.org/wp-content/uploads/2019/06/AGA-2019-State-of-the-States_FINAL.pdf
3. Id.
4. See the Supreme Court’s full opinion in MURPHY, GOVERNOR OF NEW JERSEY, ET AL. v. NATIONAL COLLEGIATE ATHLETIC ASSN. ET AL. at https://www.supremecourt.gov/opinions/17pdf/16-476_dbfi.pdf
5. T §11021 of the Tax Cuts and Jobs Act increased the standard deduction as follows: $24,000 (joint return or a surviving spouse), $18,000 (unmarried individual with at least one qualifying child) and, $12,000 (for single filers). See the full text of the Tax Cuts and Jobs Act at https://www.congress.gov/bill/115th-congress/house-bill/1/text
6. See Section 3 of Rev. Proc. 77-29 at https://bradfordtaxinstitute.com/Endnotes/Rev_Proc_77-29_S3.pdf
7. See instructions for Forms W2G and 5754 at https://www.irs.gov/instructions/iw2g
