Watch Out For Taxes When Gambling , Advisors Say
According to the Internal Revenue Service , the size of the U . S . sports-betting industry has reached hundreds of billions of dollars per year , and it ’ s in the beginning of football season that interest in betting peaks . According to statistics from the American Gaming Association , nearly 68 million Americans , a 35 % increase from 2023 , wagered an estimated $ 23.1 million on last year ’ s Super Bowl .
The tax ramifications of betting are not likely to be on top of people ’ s minds . Yet it ’ s crucial for them to know how to deal with losses and protect their winnings when they ’ re doing tax planning .
The IRS treats professional gamblers as self-employed taxpayers who must file a Schedule C with their tax return . Their winnings are treated as income at individual income tax rates and their business activities have all the regular Schedule C deductions .
The IRS has other rules for “ casual ” gamblers , where income includes winnings from lotteries , raffles , horse races and casinos in the form of cash or prizes .
The federal tax rate is 24 % on winnings exceeding $ 5,000 ( minus the wager ) from gambling venues such as football pools when the winnings are at least 300 times the wager . The IRS also stresses that all winnings are income no matter the size and should be declared as such on the client ’ s tax return .
“ Gambling winnings aren ’ t just subject to federal taxes ; state and local income taxes can also apply , with specific rules varying by location ,” says Paul Brahan , a financial advisor at Fort Pitt Capital Group in Pittsburgh . Also , “ offshore or out-of-state betting can trigger tax reporting requirements with the IRS .”
Though reporting thresholds can differ , states generally tax gambling winnings from both online and retail outlets ; the rates for both are the same in the many states . Tax rates for online winnings are at single-digit percentages in Indiana , Iowa , Mississippi , Tennessee and Wisconsin , but they can rise to about 50 % in New Hampshire , New York and Rhode Island .
States and some localities generally tax sports winnings if the money was made on a wager placed within that state . Depending on the size of the win , a client may have to file a tax return in a state where the bet was placed if that state has an income tax .
The IRS draws no distinction between retail and online gambling .
“ While most people are aware that substantial winnings are taxable , they often forget that even smaller sports betting wins must be reported ,” Brahan says .
Clients who ’ ve won on sports contests or any other gambling activity will receive an IRS Form W-2 G if the winnings were reported to the agency . Advisors say clients should earmark at least a quarter of their winnings for taxes .
“ If you win a significant amount , you may need to pay estimated taxes throughout the year to avoid penalties ,” Brahan says .
Another common misconception is the tax deductibility of losses . Advisors note that many taxpayers may not realize that their losses can also be deducted against gambling winnings .
However , those losses “ are only deductible if you itemize your deductions and , again , are limited only to the amount of your gambling winnings ,” says Richard Koenigsberg , a CPA and partner in EisnerAmper ’ s private client services group ( he ’ s also national leader of the firm ’ s entertainment and media practice ).
To claim these deductions , a client must itemize them on IRS Schedule A with their tax return — which fewer clients have generally done since 2017 ’ s tax reform .
Depending on the size of the win , a client may have to file a tax return in a state where the bet was placed if that state has an income tax .
“ Let ’ s take an example of someone who won $ 500 and lost $ 100 ,” Koenigsberg says . “ If the person is not itemizing , they still pay tax on $ 500 . If they itemize , [ they pay tax on ] $ 400 . Another individual had no winnings and lost $ 500 . Zero deduction .”
As with many potential tax problems , sports wagering comes down to paperwork , advisors say . That ’ s why , Brahan says , people should keep detailed records of their gambling activities , including their winnings , losses and the dates of their wagers .
“ Most betting platforms keep records of your wagers ,” he says , “ including the date and time of the bet , the amount wagered , the odds and the outcome . It ’ s still important to keep your own records as well , as betting platform records may not be accurate or stored indefinitely .”
— Jeff Stimpson
NOVEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 13