Uncle Sam, Bookie?
It's March Madness, and the NCAA Men's Basketball Tournament is in full gear. It seems like half of America has joined a pool, whether they play it safe with #1 seeds or try to guess the upsets. Even President Obama has joined the fun. In fact, he's doing pretty well, going 10 for 16 on Sweet Sixteen picks, ranking at the 99%th percentile on ESPN.com, and leading a pool of lawmakers collected by online reporters at TheHill.com.
If you win your local pool, and pocket a nice prize for your picks, you might find yourself with an unexpected partner in success. That's right, the IRS will certainly want their share. But what happens if you lose? Will Uncle Sam be there to ease the sting?
If you place bets with a bookie, in Las Vegas or elsewhere, you generally "lay 11 to win 10." The bookie collects a 10% commission, or "vigorish," for their service. As long as they attract an equal amount of action on each side of a game, they guarantee to come out ahead no matter who wins.
The IRS isn't quite so fortunate. But they still come out ahead with a tax code version of "heads we win, tails we don't lose." Here's how it works:
If you win, you report your winnings as taxable income on Form 1040, Line 21. All of them.
If you lose, you can deduct your losses as a miscellaneous itemized deduction on Schedule A, Line 28. Gambling losses aren't subject to the usual 2% floor of adjusted gross income. But, you can do it only if you itemize deductions. That knocks out about 2/3rds of all taxpayers right there. And you can only deduct them up to whatever winnings you report.
The final score is this: if you win, Uncle Sam is happy to help you celebrate. But if you lose, you lose alone!
The IRS is all about making it easier for you to report your income, and gambling winnings are no exception. Generally, if you win $600 or more at the track, $1,200 at the slots or bingo, or $1,500 or more at keno, the payer has to issue a W2-G reporting your good fortune — and withhold 25% of the loot! And poker tournament sponsors now have to report players' winnings over $5,000.
Reporting losses is a bit harder — the IRS requires you to keep "an accurate diary or similar record" containing at least the following information: the date and type of specific wager, the name and address or location of the gambling establishment, the names of other persons present with you at the gambling establishment, and the amount(s) you won or lost. Ouch! (Yes, you can deduct what you paid to enter your pool — and fortunately, you don't have to tell the IRS if you picked Princeton to win it all!)
We talk a lot in these emails about tax planning. And obviously, when you make a bet or enter a pool, you don't plan to lose. But just because you don't plan it doesn't mean we can't help you with it. So remember to call us with all your tax questions, and good luck with your picks!