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Doping out your tax return
Don’t look now, and you wouldn’t know it from the weather outside, but April 15 is sneaking up us. This raises some interesting questions about horse racing, contest players, and tax implications.
Mike Mayo, a successful business man and full-time horseplayer, is one of the foremost experts on this topic. He has taught classes to horseplayers about how to deal with tax issues and he’s fought the IRS and won on more than one occasion.
When it comes to a contest players’ options concerning to taxes, Mayo says, “There are only two ways to report gambling winnings/losses on a tax return. The first and most common way is on Schedule A. A person reports all winnings and can offset documented losses against those winnings up to the amount reported.
“Example: $100,000 in winnings can take up to $100,000 in losses for a net effect of zero. This also includes contest winnings. A player filing on Schedule A can deduct contest entry fees only, no other expenses against the winnings. The entry fee is considered a bet. The player had to pay the fee to enter the contest, just as they make a bet to have winnings. Any amount of winnings greater than losses is taxed as ordinary income.”
The other option is to file a Schedule C, which treats racing as a separate business. This is what Mike does, in addition to filing a Schedule A for his other job. By declaring himself a professional horseplayer and filing a Schedule C for his racing business, Mike is able to write off business expenses related to horse racing in addition to contest entry fees and losses.
Mayo is keenly aware of the mistakes many people make when it comes to the IRS. “Most horseplayers do not keep good records,” he said. “And therein lies our problem. There are guys that play the horses every day like I do that could technically file a Schedule C but don’t because they don’t keep good records. And it’s really not all that hard. All you need to do is keep track of how much money you put through the windows in an annual year and what are your winnings.”
Selective record keeping will not fly if you want to be considered a pro, “You have to treat it like any other business,” Mayo said. “If I win $6,000 and there’s no paper trail, I still report that income as part of my business. That’s what you’re supposed to do under the law. Claim everything, not just the signers. Guys want to have their cake and eat it, too. That’s where the IRS gets you. You have to be all in as a separate business or be all out. You can’t be halfway.”
Mayo keeps records on a daily basis. “I have three Excel spreadsheets that I use and it’s real simple – one tracks what I put through the windows, one tracks my daily profit or loss, one tracks my daily expenses. And then I have a separate sheet for tournaments and another where I track my yearly expenses, subscriptions for data et cetera.”
In addition to the spreadsheets, it’s a good idea to have some proof of your individual bets. Your account-wagering company should be able to provide this information but Mayo, because he lives in Texas and can’t bet via account wagering, must do this manually, so he staples together his losing tickets for each day and files them.
Successful contest players can have a tougher time when it comes to the IRS – unless they also play full time like Mayo does. “If you only go to eight or nine tournaments a year,” he said, “the IRS is going to consider that a hobby still. It’s a real gray area as to how much is enough to declare yourself a professional horseplayer. And I don’t advise guys doing it just for the tournament game alone. That’s going to look like something you do as a hobby. I might play the horses 20 out of the 30 days in a month – that’s like a second job.
“If you go to a tournament and you’re not really a professional horseplayer, and you get lucky and win a lot of money, you’re going to have to pay the tax on that as ordinary income, Schedule A not Schedule C. If you win $750,000 at the NHC that’s going to probably put you in the highest bracket, 39 percent. It’s brutal, but you’d have no choice.”
One mistake a lot of people face is trying to declare themselves professional gamblers only after having a big score. This is a bad idea, Mayo said. “Most people get into trouble with this. The IRS is wise to this and can usually spot it pretty quickly on a tax return. It will trigger an audit. You need to already be established as a professional gambler before you have the score.”
If you wanted to declare yourself a professional gambler going forward, this would be the right time of year – start keeping records now. Of course, every situation is different and you should always consult a tax professional before making a final decision.
The first signer I had a few years ago taught me the value of keeping good records. I should have had enough losses to offset the ticket but most of my tickets were on the floor of the OTB. I now keep every ticket. For winning wagers I write the wager costs and payoffs on the back of a losing ticket and then write the overall totals on a small calendar. This also goes a long ways towards managing the addictive side of the game. If I have a bad month I see it in black and white (or red as the case may be) and can adjust accordingly. Now I just hope that if I do get audited the IRS understands the $64 pick 4 ticket that lost $50 because four even money favorites got home!
Or move to Canada. No taxes on gambling, few gun nuts so there is no chance of being shot while gambling, and no worries on health expenses because they are all covered. Amazing...north of the 49th...civilized. Below...not so much.
Even though most of us know that gambling losses are only deductible up to gambling winnings, a lot of horseplayers that are into other forms of gambling fail to take into account that they can also deduct losses from those exhibitions as well. That includes loses from poker, craps, blackjack, keno, lotto, lottery scratch offs, bingo etc. (Of course, the winnings from those would have to be reported as well). And Peter, since gambling loses on the Schedule A are subject to limitations like most other itemized deductions, it is not subject to the AMT (Alternative Minimum Tax). But what hurts the typical gambler here is that because the gross winnings still need to be reported on the face of the return as part of AGI (Adjusted Gross Income), it takes a bite into the potential credits that are used to offset total income.
out of the ivory tower guys. I play with some vary heavy hitters who also happen to be winning horse players not a lot but few. and i have yet to meet one that pays the government a dime they all use someone to cash for 5-10 percent or use fake ids,
A few things have come to my attention since I wrote this piece that might be of interest. On Schedule A on the federal return, if you take gambling losses against winnings you have to itemize, not take a standard deduction. Further research is required as to whether the alternative minimum tax applies to deductions of gambling losses. Also, I didn't talk to Mike at all about the implications of state taxes. Amazingly, there are still states that don’t allow you to deduct gambling losses against winnings on Schedule A. So if you declare 200,000 as gambling winnings and 180,000 as losses for state purposes that’s income of 200,000. As I did state clearly in the main article, definitely consult a tax professional -- preferably one with experience in this area -- before making any decisions.
Assuming you meet all the requirements of qualifying your horse racing activities as a business, you can go to the next level and establish a 401k or profit sharing plan to make retirement contributions that are deductible. This is pretty sophisticated and requires professional help in establishing the plan and filing the proper documents. Simplistically the contribution limits are $17,500 and $23,000 for catchup.
It is a big mistake for players to only claim the winnings stated on w2g's when they file, whether they are using Schedule A or C. The IRS considers a $2 show bet returning $2.10 as income. If a player only has one IRS sign up through the year and declares that as his/her only winnings and writes off losses against that sole w2g, than he or she has most likely down their taxes wrong. I was actually pulled in to the IRS about 15 years ago for them to specifically tell me this. Needless to say, my taxes have been done correctly since. And I've only faced the auditor one time since.