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March Madness Winning Bets Become Taxable Income

Mar 6th 2018
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March Madness is here. This is the time of year when employees, friends and family members participate in pools based on the bracket parings for the NCAA basketball tournament. While most brackets are busted early on — the tournament has a rich history of upsets — some prescient “brackentologists” walk away winners.

But there’s more to the story. Technically, March Madness pools are a form of gambling, subject to the usual tax rules for these activities. Therefore, if you win, you’re required to report the accumulated taxable income on your federal tax return, although it’s often ignored. And this can also lead to state income tax complications.

Starting point: Winnings from office pools and other March Madness bets are fully taxable, just like winning wagers from other sporting events like the Super Bowl and World Series.

Similarly, betting at casinos, racetracks and other venues counts as gambling for tax purposes, as well as bingo games at the local church or temple and lottery tickets at a convenience store. If you’re in it to win it and you do, you owe income tax.

If you’re lucky enough to win $1,200 or more, you should receive a Form W-2G listing the amount. As with a W-2 for wages, the IRS gets its own copy. So, if the person in the next cubicle running the pool meets this obligation — not very likely — you’re officially on the hook. Typically, entities such as nonprofit organizations that provide NCAA pools will follow through on reporting responsibilities.

On the flip side, you can deduct losses from gambling activities for the year, up to the amount of your winnings. For example, if you win $2,500 in an NCAA pool and then drop $2,000 at a casino and lose, you can deduct $2,000 on your personal 2018 return. In effect, only $500 is taxable.

This gambling loss deduction is essentially preserved by the new tax law, the Tax Cuts and Jobs Act (TCJA), although the TCJA eliminates or scales back several other itemized deductions. Accordingly, advise your clients to keep detailed records of their gambling activities. Usually, a log accompanied by any available documentation is the best proof you can have.

As far as state income taxes go, each state has its own rules. For example, if hit the jackpot in Las Vegas or in six other states besides Nevada — Alaska, Florida, South Dakota, Texas, Washington and Wyoming — no state income tax is due. But most jurisdictions impose tax on gambling winnings, much like the IRS does.

What’s more, in 16 states — including high-population Massachusetts, Michigan, New York and Ohio — you can’t deduct losses against winnings. This creates a double tax whammy for gamblers residing in those states.

Bottom line: Keep your clients informed about their tax liabilities and opportunities. A buzzer-beater during March Madness could have other unforeseen results.     

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