02/27/2014 1:23PM

Doping out your tax return

Email

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.”

:: Click here to purchase a copy of “The Winning Contest Player” by Peter Thomas Fornatale

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.

Glenn More than 1 year ago
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!
Michael Parker More than 1 year ago
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.
Peter Fornatale More than 1 year ago
Heh. I have to admit gambling laws (and other laws too) are A LOT more civilized in some other countries. Amazing we are still punished to the extent we are but that's how it is at the moment.
David G. More than 1 year ago
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.
Peter Fornatale More than 1 year ago
Tx for the info DG, I appreciate your taking the time to post. . .
John Gaede More than 1 year ago
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,
Peter Fornatale More than 1 year ago
Ten percenting is illegal, both for the person doing the ten percenting and the person hiring the ten per center. . .also, legality aside, it's a lot less relevant in the ADW era.
Jerry B More than 1 year ago
I can understand why someone would use a 10%er when no $ is with held , but why for example if you made 100 g and they held 25g would you also pay 10% cash when you might be able to get some of that 25g back if you sign yourself?
Jerry B More than 1 year ago
You're dream'n dude , You don't hang around anybody that wins in the long run , thats why they made tournaments because someone has to win. Just because your guys bet big money and make big scores doesn't make them winning horse players....there are none.
Peter Fornatale More than 1 year ago
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.
Will LaTulippe More than 1 year ago
Among them, Massachusetts, which also now imposes an automatic 5% withholding on any payoff of $600 or greater. Fight the man.
DarwinLabordo More than 1 year ago
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.
Peter Fornatale More than 1 year ago
That's right. When you are filing in the trade or business (schedule C) you are permitted to establish a 401K in addition to being able to take expenses. OTOH, you are required to pay social security taxes which is not an issue with Schedule A.
Dennis More than 1 year ago
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.
Peter Fornatale More than 1 year ago
I agree Dennis. I've heard accountants advise players not to take deductions against signers for that very reason -- unless they are willing to keep full records.
Andrew Bertolino More than 1 year ago
Hello Peter, What are the best and worst states to live in as a professional horseplayer? Thank you. Andy
Peter Fornatale More than 1 year ago
I don't know offhand Andrew but the turbotax website seemed to have info on this question -- I hesitate to reprint it here because I'm not sure copyright wise how much I'm allowed to. But have a look and you'll get an idea.
Robert More than 1 year ago
The IRC requires all gambling income to be reported. Losses can be deducted to the extent of winnings, thus no greater than zero gain. The problem people run into is that they have a W2-G for gambling winnings and offset it on schedule A as an itemized loss. If audited and asked to prove the loss, the person typically then produces an accounting from the casino or waging service, which shows all wins and losses which the might show a profit and thus taxable income. The real rub comes in those states that base there tax on adjustable gross income. You're screwed - the winnings are in AGI but the losses are on itemized deductions which don't count for most states, thus all taxable income to the state. Not sure 10%ers are the answer. Best approach may be a little thought before cashing the big ticket (W2G) or having multiple advance waging accounts to mine the losses for backup. At the end of the day, it is very hard to have a profit with the high takeouts on the exotics. Even with a nice score, to offset all the losers and the takeout at 25%+ is difficult. Ought to be a free point, such as first $10K is not taxable - won't happen without wonderful Congress who can't agree on what day it is.
Peter Fornatale More than 1 year ago
LOL! Nice post Robert, tx for commenting.