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Tax on Gambling in the United States

April 2, 2015 : Brad Polizzano – Guest Contributor

Editor’s Note: Have you caught basketball fever? It’s around this time of year that gambling – and the tax issues related to it – gets a lot of conversation. While Warren Buffet took his million-dollar prize off the table, you may still be pocketing a nice wad of cash from the office pool or from a Vegas betting operation. In either case, you still need to know how to handle the money at tax time. Here’s how.

Thanks to the NCAA Men’s Basketball Tournament, millions flock to Las Vegas every year in late spring. Last March, the city set a monthly tourism record with 3.7 million visitors. Nevada is the only state in the U.S. where one can place a legal wager on the outcome of a single sporting event – but according to the FBI, approximately $2.5 billion is illegally wagered on March Madness alone each year.

With millions of potential tax revenue at stake, some other states are contemplating legalizing sports betting. One state, New Jersey, has gone a lot further than that.

New Jersey is currently involved in a legal battle with the four professional sports leagues and the NCAA. New Jersey had enacted a law that would allow the state’s casinos and racetracks to accept wagers on sporting events. The leagues filed a lawsuit claiming that New Jersey’s law violated a federal law called the Professional and Amateur Sports Protection Act. The case is currently on appeal.

A significant expansion of legal sports betting in the United States seems inevitable. The commissioners of the NBA and MLB have recently recognized such. We’ll see how it plays out.

In the meantime, whether or not legal, there are tax implications from winning money or prizes in an NCAA pool. We delved into this topic a year ago. In general, gambling winnings are reported as “other income” on Form 1040, and gambling losses are deductible up to the extent of winnings as an itemized deduction on Schedule A.

A taxpayer must separately record each gambling winning “session” and gambling losing “session,” and report the corresponding totals. A taxpayer cannot simply net all gambling winnings and losses from the year and then report that single amount.

For example, suppose I spent some time in Las Vegas for the second round of the NCAA Tournament. On March 19, I placed one wager on an NCAA game at the Caesars Palace Race & Sports Book and won $100. Then on March 20, I placed one wager on a game at the Cosmopolitan Race & Sports Book and lost $50.

On my tax return, I would report $100 as “other income” and report a $50 gambling loss on Schedule A as an itemized deduction. I would *not* simply report the net of $50 as gambling winnings under “other income.”

This is significant because itemized deductions do not reduce a taxpayer’s adjusted gross income (AGI). AGI is tied to the tax treatment of other items, such as deducting medical expenses (only to the extent they exceed 10% of a taxpayer’s AGI) or unreimbursed employee expenses (only to the extent they exceed 2% of a taxpayer’s AGI). Ultimately, separating gambling winnings and losses may further limit the ability to deduct other items on the tax return.

I hope luck has been on your side with your 2015 March Madness brackets so far. Considering my brackets have been busted early on in the last few years, I’ve leaned toward letting “eeny, meeny, miny, moe” determine my fate. I couldn’t do any worse!

Brad Polizzano – Guest Contributor

Brad Polizzano – Guest Contributor

Tax Dood

Brad is a tax attorney and accountant in New York City. He represents taxpayers in disputes with the Internal Revenue Service and the New York State Department of Taxation and Finance.

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