Proposed Changes: Notice 2015-21

     There have been a lot of changes in the gaming industry since the IRS wrote its rules for reporting gambling transactions back in 1977. Technology has evolved significantly. Slot player cards and electronic slot machines were still to come. On line and mobile gaming didn’t exist at all. Wins were reported to the IRS by the casinos on paper forms. E-filing was unheard of at the time.

     After 38 years, change may finally happen. (Big sigh of relief!) We have seen how quickly the government moves on these types of things. Lets hope the change is one that benefits us all. IRS promises sometimes need to be taken with a grain of salt, and we’ll keep our fingers crossed.

     On March 3, IRS published Notice 2015-21 detailing a “Safe Harbor Method for Determining a Wagering Gain or Loss from Slot Machine Play.” The proposal defines a daily session for slot machine play where there are electronic records, and how wins and losses are reported — mostly by the casino but also to some extent by the player. I’ll go into detail about some of these proposals in a later entry. You can read through the entire notice on the web now if you don’t want to wait, but be warned, tax talk can be kind of dull. None of any changes adopted will go into effect before January, 2016.

     IRS will be holding a public hearing at 10 am on June 17 in Washington DC in order to gauge public opinion on the changes. You will need to register to attend. Written or electronic comments must be received by June 2. Usually, most of the discussion will be led by lawyers, CPAs, enrolled agents, and other tax professionals, but it doesn’t have to be that way. This is the opportunity for all of us gamers who are affected by this to have our say. While if may be difficult, and you might think they won’t listen, this is our chance. And here is how to do it:

     Hand deliver or mail comments to: Room 5203, PO Box 7602, Ben Franklin Station, Washington, DC, 20044

     Electronically you can comment at: Notice.comments@irscounsel.treas.gov
     Attend the public hearing: IRS Auditorium, 1111 Constitution Av, Washington, DC

     The IRS is asking for comments on specific issues. according to its notice. Specifically, taxpayers should comment on:

• Alternative definitions for the term “slot machine”
• Whether an interruption in play should result in more than a single session; 
• Whether a session should be based on a period other than a calendar day;
• Whether the definition of a single session should be determined by other factors;
• Whether the safe harbor should include merchandise and bonus reward payouts;
• Whether a safe-harbor method should be developed for other forms of gambling

     If you have other comments, include them too. You may not get another chance for another 38 years!

March Madness Office Pools

Baseball may still claim to be America’s National Pastime, but TV ratings and profits tell a different tale. More often writers and pollsters show the sport ranking third behind football and basketball.  But in March there is no contest. In March everybody’s favorite sport is basketball — NCAA tournament basketball. Ask anyone this time of year what’s his favorite sporting event to watch or bet on, and you will almost always get the same answers: the Final Four basketball tournament, March Madness. Professional football may be a fantasy favorite and have the Big Game “Superbowl Sunday”, but collegiate basketball has an entire month devoted to hoops hysteria.

Were you one of the more than 40 million Americans who filled out an estimated 70 million NCAA basketball brackets last month? How did you do? Did you win any money? Did you report those winnings as income? Probably not.

We’re told that more people fill out Final Four Tournament Brackets than cast a ballot for President Obama in the last election. (Does that mean Bracketology could claim to be the “National Pastime?” ) Obama fills out an NCAA bracket himself each season in the Oval Office, but he didn’t do too well this year. Kentucky let him down as it did many fans. But it doesn’t matter because he probably wouldn’t get to wager in a White House bracket pool anyway. As my readers know, sports betting is illegal almost everywhere. 

Nobody publicly offered a billion dollars for a perfect bracket this year as they did in the past, but there were many bracket contests you could enter - some for free. But, you know, it’s more fun to play if you have a chance to win a little money. That’s why office pools are so popular. Most of the wagering on the NCAA tournament didn’t happen in sports books in Nevada, where it’s legal to bet on sports. Most people who paid to play filled out their brackets with friends or coworkers, and pooled their entry fees for the chance to win the pot. Pretty much like players  and statistics lovers do for most fantasy sports  games everywhere. 

Gallup polls say 17% of Americans have wagered on sports in the past year. You may remember reading in my book, “Spin To Win,” and in an earlier entry in this blog that sports wagering is illegal in all states except Nevada, Delaware, Oregon, and Montana. That’s because only these four states allowed sports gambling in 1992 when the Professional and Amateur Sports Protection Act (PASPA) was passed. PASPA effectively prohibits sports gambling everywhere — except in these four states. So what did those 17% of Americans do? They just ignored the law. They made their picks and paid into their office pools — and didn’t once think they might be doing something illegal.

     The FBI estimates about $2.5 billion dollars was wagered on bracket contests last month. The American Gaming Association estimates a figure closer to $9 billion. Nobody knows for sure because nobody reports it - except for the large Vegas payouts and probably the bracket winners interviewed on TV.  Did you include any fantasy sports winnings on line 21 of your IRS form 1040? I didn’t think so. I guess we are all criminals at heart, guilty of violating the law by wagering where it isn’t legal to do so and failing to include our fantasy winnings in income.

Don’t worry. IRS and FBI agents will not bother to descend on your workplace to arrest everyone who entered your office pool. But maybe it’s time for further dialogue and a little common sense on the topic of sports betting. Most people don’t really think of fantasy football leagues or March Madness brackets as gambling, let alone as being illegal. And it would not occur to most people that they should pay tax on their winnings from these games if they had any. It’s entertainment. It’s your money. You should be able to do what you want with it. And it’s a lot more fun than buying a state sanctioned lottery ticket. 

Let’s use our common sense and modify our gaming laws so we don’t have to break the law next year when we fill out our brackets. Wishful thinking? Maybe. Or maybe it’s time to write our representatives a letter.

Tax Freedom Day 2015

April 15 is just around the corner and many of us procrastinators are still struggling with our 1040’s, attempting to complete the onerous forms before the deadline arrives. Will we owe? Or will we hit the jackpot and get a refund this year? How much of that tax we owe can we trace back to the fun we had playing the slots and table games at our favorite casinos? I hope we all won big and can blame a lot of our tax tribulations on lucky spins on our favorite games!

There’s another special day in April connected to taxes: April 24 - Tax Freedom Day this year.

No, that’s not a day we celebrate because we’ll be free of having to pay taxes on April 24. (Wishful thinking!) It’s the day when we as a nation will have earned enough to pay our total tax bill for the year. Tax Freedom Day takes all taxes - federal, state, local - and divides them by the nation’s income. In 2015, according the web site taxfoundation.org, Americans will pay $3.28 trillion in federal taxes and $1.57 trillion in state and local taxes, for a total tax bill of $4.85 trillion. That’s 31% of all national income. This year Tax Freedom Day falls on April 24, 114 days into the year. It’s one day later than last year due to the expected tax revenue boost from corporate, payroll, and individual income taxes. 

This year Americans will work longer than ever before to pay all of these taxes - 43 days. Payroll taxes will take 26 days to pay. Sales and excise taxes - 15 days. Corporate income taxes - 12 days, and property taxes - 11 days. The remaining 7 days are spent paying estate and inheritance taxes, customs duties, and other levies.

Since 2002, federal expenses have surpassed federal revenue. In 2015 the deficit will decline to $580 billion. (We hope.) At least that’s what this site says. If this annual federal borrowing is included - which represents future taxes owed - Tax Freedom Day would occur on May 8, 14 days later according to the site.

There’s a map  of the United States included on the taxfoundation.org site that gives the State Tax Freedom Day dates for residents of each state in the nation. You might find it interesting. I did. 

I live in California - and we pay A LOT in taxes here. The site says we are the 4th highest in the nation. Tax Freedom Day for those of us who live in the Golden State is not until May 3. In Indiana where I spent most of my life, taxes are the 10th lowest, and Tax Freedom Day is earlier, April 18. Connecticut and New Jersey have to work the longest, till May 13. Louisiana’s tax freedom day has already passed, April 2.

Thanks to taxfoundation.org and economist Kyle Pomerleau for the depressing statistics in this timely posting.

Gambling and Taxes: Part 3

 Part 3 

Keeping a Gambling Diary

     I know tax talk makes for pretty dull reading, but it’s a necessary topic. Stick with me and you’ll learn to keep more of what you’ve won when you file. I’ll try and keep this as simple as I can. 

     Previously we looked at a tax situation where the taxpayer couldn’t deduct his losses because he didn’t have more itemized deductions than his standard deduction. Even though he kept records for most of the year, he didn’t have enough to deduct what those records showed he lost gambling. But what if your situation was different? What if you could itemize. What if you were paying mortgage interest and property taxes and made charitable contributions and had other deductions that totaled more than your $6,200 standard deduction? Could you deduct any of your losses then?

     Suppose you also got a W2G for $4,000 from the casino where you played, but you knew that jackpot win wasn’t what usually happened. Usually you lost $100 or so on the slots when you played there almost every week. Suppose you also bought Powerball lottery tickets twice a week. Could you deduct any of those losses on your tax return?

     Well, it depends on what records you kept. Fair or not, the IRS says you have to keep records to deduct losses. If you don’t and you are audited, they can disallow part or all of your write-offs. They can refigure your taxes using only amounts you can prove and charge you tax and interest and even penalties on the difference. 

     That doesn’t seem fair, you say. I didn’t know I had to have proof of how much I lost, you say. It’s not right that the casino reported the $4,000 jackpot I won, but didn’t report all the money I lost during the year, you say. 

     No, it’s probably not fair, but that’s the way it is right now. Currently, casinos are only required to report winnings of over $1,200 from slots or bingo games and $1,500 or more from keno wins. Tracks have to report wins of $600 or more from horse or dog racing. None of them likes doing this. None of them wants to go to the trouble of reporting every payout for every gambler every time he plays. Who wants to fill out all that paperwork for the government if they don’t have to? They’ll report what the law says they have to report (your big wins), and they’ll leave it up to you to track the rest of it.

     IRS publishes revenue procedures to help taxpayers and tax preparers understand what the law requires. The revenue procedure that provides guidelines for wagering income and losses is Revenue Procedure 77- 29. It was published almost 38 years ago and went into effect May 10, 1977. It hasn’t been changed since. That seems like a long time to go without an update, but that’s the way it stands right now. It’s what will determine the taxes you pay this year. You can read it on the internet if you like.

     If you do, you’ll be told that in order to substantiate and deduct your losses, you must keep a gambling diary. In it you are expected to record every time you gambled, when and where you played, who you were with that could back up your claims, and how much you won or loss each session. They don’t tell you what a session is. Is it a single wager or is it all the wagers made on a single machine or maybe it could be all the wagers made during the entire casino visit on a single day? New regulations will be written later this summer that will clarify this, but for right now, you are on your own. Tax courts have ruled, however, that a gambler could not reasonably be expected to record the results of every individual spin of the slot machine. If you haven’t been keeping a gambling diary, start now. Sites on the internet will offer to sell you journals that you can use for this, but any notebook or computer spreadsheet will do.

     Don’t wait for the “big one” to start keeping records. Yes, it’s a pain to log your results each time you wager, but it’s not as painful as paying taxes on the entire jackpot win because you didn’t take the time to write down the information about your losses in a notebook.

     Along with your journal, the IRS says you have to keep verifiable supporting documentation like bank withdrawals records, cancelled checks, ATM receipts, losing lottery tickets, and statements provided by the casinos. Some of the suggestions in this 38 year old procedure seem unreasonable and outdated today. For instance, it suggests you write down the machine number for each slot you played and tells you ask the casino operator for it if you don’t see it. There are suggestions as to what supporting evidence you should keep for other forms of gambling like bingo, and horse racing, and table games in that revenue procedure too. 

      Here’s the most important thing to know if you are able to itemize and deduct losses against gambling income. The income and losses don’t have to come from the same form of gambling! You can have winnings from slots and table games on line 21 of your 1040 form and losses on your Schedule A from bingo games and lottery tickets and horse racing as well.  

     Gambling losses are gambling losses no matter where you lost the money. Gambling winnings are taxable income no matter where you won it. And it’s all easier to report and you’ll give IRS less of your hard earned money if you’ve kept good records every time you’ve played. 

     Hopefully when the new gambling regs come out later this year, IRS will clear up some of the problems with the old ones. Watch this site for more information as it becomes available.

Gambling and Taxes: Part 2

 Part 2
Netting Wins and Losses

     In Part 1 we reminded our readers that all gambling wins are taxable and must be included on line 21 of Form 1040. We also pointed out that gambling losses are deductible - but only as itemized deductions on Schedule A and only up to the amount of winnings reported. If you won a thousand and lost two thousand  - too bad. You can’t deduct more than the $1,000 you won. 

     Taxpayers sometimes argue mistakenly that, to be fair, they should be allowed to net together their wins and losses and report the difference as income. Will the results be the same? No, they won’t. The example that follows will illustrate the difference. IRS regulations do NOT allow this netting, and we all know why. IRS is in the business of collecting as much as they can to run the government, and they would collect less tax if netting were allowed.

     To illustrate this difference, lets take the next step and crunch the numbers on a very simple tax return. You’ll see that the amount of tax you would pay will differ under these two systems -  using IRS’s rules vs netting gains and losses, the method that seems fairer to many filers. Most people have more complex tax situations than this basic return, but the principle is the same no matter how complicated the rest of your tax return is. 

     To keep the calculations as simple as possible, our hypothetical gambler will be 24,  a renter, and single with no dependents.  His only income reported by payers to the IRS for the 2014 year was $35,000 of wages on his W2 and a $4,000 jackpot reported by a casino on Form W2G.

     When he won his jackpot, the workers at the casino advised him to keep a gambling diary for the remainder of the year. He did. It shows another $1,000 income from totaling his other winning sessions and $3,000 of losses from his losing ones. These amounts were not reported to IRS, but he was told he should voluntarily report his winnings on his tax return. Casinos don’t report losses to the government, and they only report wins of over $1,200. - now. This may change soon. More later on this.

     For 2014 the standard deduction for our young filer is $6,200. This is more than his $3,000 of gambling losses. Since he has no other itemized deductions like mortgage interest, and property tax, and large charitable contributions, he can not find more to write off by itemizing than the $6,200 standard deduction. You should always pick the bigger number. Since he can’t write off more than $6,200, there is no way he can deduct his gambling losses. The $3,000 loss goes to waste. This is the bad news that tax preparers hate having to tell you.

     In most gamers’ minds, the FAIR amount of gambling income to pay taxes on would be $2,000. (The $4,000 jackpot reported to the IRS by the casino, plus the $1,000 other winnings not reported to the government by but which he included voluntarily, minus the $3,000 in losses substantiated by his gambling diary and the win/loss statement for the year by the casino). The IRS regulations, however, say he has to pay tax on $5,000 of gambling income. (The $4,000 reported on the W2G and the $1,000 of additional gambling income from his records.) 

     Taxes are figured for our filer by adding all his taxable income, subtracting the$6,200 standard deduction (or the total itemized deductions if larger), subtracting $3,950 personal exemption, and looking up the amount remaining in the tax table.

     If you do the math the IRS way, you have $29,850 to look up in the tax table and the total federal tax will be $4,043. If you had been allowed to net the gains and losses together and calculate the tax on the difference, you’d have $26,850 to look up the tax on and your total federal tax would have been $3,570.  The difference is $473. That’s $473 more tax you’ll have to pay.

     Here’s more bad news. No taxes were withheld when you won that casino jackpot. So, you will probably owe money when you file. That’s money you have to come up with somewhere. Maybe you could go back to the casino where you won the jackpot and try to win another one!

     And there’s still even more bad news. If you live in a state that has a state income tax (which is any state other than Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming -- or Tennessee and New Hampshire which only tax interest and dividend income) the amount of income your state tax is calculated on will be $3,000 more than if you had been allowed to net gains and losses. So not only will most people pay more federal tax, they will pay more state tax also.

     And another problem many will have - probably not the gamer in this example, but filers with children or who have certain deductions, credits, or exclusions based on  their Adjusted Gross Income - inflated AGI will reduce many of these benefits. Taxpayers who qualify for the Earned Income Credit, or Child Tax Credit, or Adoption Credit, or various other credits will find the extra income reported on their return reduces the amount of credit they qualify for.

     And it doesn’t get better when you are older. My husband and I are both over 65 and have higher standard deductions as a result. Instead of $12,400, our combined standard deduction is $14,800 so there is even less likelihood that we can itemize and deduct our losses. In addition, we have enough other income that we have to pay federal tax on much of our Social Security income. The portion of our Social Security that is taxed also rises with higher AGI.

     As you might expect, the taxpayers who benefit from itemizing and can deduct their gambling losses are the ones with the large mortgage interest and property tax payments exceeding their standard deductions. Isn’t it funny how so many tax breaks seem to help out the wealthier filers but not the middle class or struggling wage earners!

     IRS may do something about the unfairness of taxation on gambling income in the near future. They may make things worse. I will be posting news about proposed changes to the gambling regs in a few weeks after this year’s returns are filed. I’ll also be providing you with an address where you can mail your comments and suggestions if you have ideas for ways the system can be improved. Stay turned.

Gambling and Taxes: Part 1

Part 1

Even When You Win You Lose

  So it’s nearly April, and that means it’s tax time here in the US. If you’re a gambler, even if you pay someone to fill out your forms, taxes are something you need to know about. Yes, I know tax talk can be dry and hard to understand, but I’ll try to keep it simple and stick to just the basics. If you’re already knowledgeable about taxes and gambling, this part may not be for you. Feel free to skim or skip ahead. If you aren’t an expert, stick with me because the tax deadline is just around the corner.

  Most of us occasionally read articles and books about gambling. Many of them seem to gloss over the part about taxes or they simply tell you to talk to your tax preparer. Why do they do this? It’s because they don’t want to deliver the bad news - all income won gambling is taxable, and the taxes are not figured in a way that will seem fair to you.

  Okay, here are some basics:

  If you win anything, anytime during the year, you are expected to remember it and report it. If you win $1,200 or more on a single wager, the casino will take your Social Security number and issue you a W2G form to file with your taxes. The “G” as you might have guessed stands for "Gamble." They will also send IRS a copy to keep you “honest.” 

  It will be up to you to report ALL your winnings at tax time, not just the winnings on the W2G forms you may have received. In addition, if you are ever audited, you will be asked to produce a gambling diary substantiating your wins and losses each session. These figures should be supported by the yearly win/loss statement the casino can print out for you if you have gambled with your player’s card. They should also be supported by ATM and bank statements and evidence of other gambling expenses such as losing lottery tickets and scratch offs.

  How many people do you know that keep a gambling diary? Probably none. Not until they have a big win and wonder about how much tax that win will cost them. Only then do they begin to worry about whether they can deduct any of their losses against that win. This is when most people start to keep better records. In all my times gambling, I think I have only seen one person in the casinos I visit recording her outcomes in a gambling diary.

  If you are like many taxpayers, you probably file IRS Form 1040 A or 1040 EZ. You won’t find a line on either of those forms from gambling income or gambling losses.

  OMG! What do I do? 

     Well, here’s more bad news. You will have to file the “long form” Form 1040 to report your winnings. And you can only deduct losses if you itemize on Schedule A, and only to the extent of your winnings. Even then, not everyone benefits from itemizing instead of taking the standard deduction.

  Stay tuned… In my next article on this subject, we’ll look at an example and go through the ins-and-outs of what a person really has to know. As you will see, this can be a lot more complex than it needs to be. Thankfully the IRS is reviewing some of this process, but changes are never guaranteed. But more on that later.

Olympic Sports Betting Update

  It’s unanimous! Amateur sports regulations no longer ban betting on Olympic events at your favorite Nevada sportsbook. You can bring home the green in Vegas while your favorite USA athletes bring home the gold in Rio in August 2016.

  On February 24, I reported HERE Olympics that a group led by the South Point Casino sportsbook was lobbying the Nevada Gaming Commission to rule that the ban on non-collegiate amateur sports should not apply to Olympic events because of the professional status of most participants. As hoped, the Commission totally agreed. Two days later, on February 26, In a move unopposed by anyone in the industry, gambling regulators in Nevada voted to allow betting in Las Vegas sportsbooks on the 2016 Olympic Games. 

  Bookmaker William Hill has already released a mobile app with future odds for many of the events. His line for the USA to win in men’s basketball opened at -320. Usain Bolt’s chances of a gold medal for the 100 meter dash are -200. You can see other futures listed in the March 12 Las Vegas Sun article by Case Keefer HERE.

  Changes may eventually extend beyond Olympic sports. The commission amended the language in the regulations to specify that bets can be accepted only on events not likely to be affected by wagering. Also, there will not be betting on children’s events such as the Little League Baseball World Series. Keep in mind too, what we discussed in earlier posts about restrictions on internet betting and sports betting in all but four states currently. Nevada is hoping the 2016 summer Olympics will prove to be as financially successful for the casinos as the World Cup games were last summer. Here’s hoping they’ll be financially successful for you and me too!