Tax Clients Who Make Wagers Raise the Game for Practitioners

Given the increased access of sports wagering, tax practitioners are more likely to have clients with gambling and gaming income in the coming years. Recent revenue losses by the IRS on gambling winnings means those clients should expect more aggressive agency enforcement on that income.

The Treasury Inspector General for Tax Administration in a report last month found several issues related to income tax filing requirements for recipients of gambling winnings—about 150,000 individuals who won over $15,000 but didn’t file a tax return on those earnings, for example.

Tax practitioners must clarify that all income from their US clients, including gambling winnings, must be included on their tax returns as gross income. All winnings are considered taxable income, whether they’re reported on a Form W-2G, Form 1099-MISC, or Form 1099-K.

A business or organization that pays gambling winnings must report those winnings once they reach a certain threshold. Most organizations will withhold federal income taxes when winnings total at least $5,000. There are exceptions—gambling winnings from bingo or slot machines generally aren’t subject to income tax withholding.

For casual gamblers, winnings should be reported as “other income” on their tax return. Sports betting is relatively new in some places, and there may be questions about how the reporting would work when there are multiple wagers that occur at the same time.

While the withholding may cover the federal tax obligation of the gambling winnings, depending on the amount of the winnings and the taxpayer’s other income, it may not be enough, considering that the top federal income tax rate is 37%.

State income taxes also may be owed on the winnings, depending on the taxpayer’s residency. Careful tax planning is critical to assist those who may need to make federal or state estimated tax payments to cover their liability and minimize penalties and interest for balances due.

Taxpayers who are casual gamblers that have winnings also are likely to have losses. Gambling losses can be deducted only if a taxpayer itemizes deductions and keeps a careful record of their winnings and losses. Additionally, the amount of deducted losses can’t be more than the amount of gambling income reported as taxable income.

In other words, if they report $5,000 of winnings as other income and have $20,000 of gambling losses, they’re only allowed to report $5,000 of losses as an itemized deduction on Schedule A.

Another item to note is the increased standard deduction allowed by the Tax Cuts and Jobs Act. A taxpayer would need to exceed $14,600 for single filers and $29,200 for married couples filing jointly to receive a benefit for the gambling losses. So if a single taxpayer had $7,000 in itemized deductions before the gambling losses, the total itemized deduction would be $12,000, so using the standard deduction would provide them with a better tax benefit.

Tax practitioners should remind clients to keep a clear record of the winnings and losses. This can be in the form of a diary listing the date and time of the specific wager activity, the name and address of the gambling establishment, and the name(s) of the people present at the gambling establishment. The IRS offers details about the ability to deduct gambling losses.

Taxpayers who meet professional gambler criteria under a facts and circumstances test have different rules. Their gambling winnings and losses must be reported on Schedule C: Profit and Loss From Business and will be subject to self-employment tax.

Unlike amateur gamblers who can’t net gambling winnings with losses, professional gamblers computing their business income can net all wagering activity but can’t report an overall loss. The professional gambler also may deduct ordinary and necessary expenses incurred in connection with the gambling business, unlike casual gamblers.

As tax advisers approach year-end planning with clients, it’s a good time to have a conversation about gambling activities. Areas with deep-seated sports rivalries may provide an opportunity for practitioners to ask whether their clients have dabbled in the new world of sports betting.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

April Walker is lead manager for tax practice and ethics at the American Institute of Certified Public Accountants and Chartered Institute of Management Accountants.

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