01/04/2013 3:19PM

Steven Crist: Horseplayers avoid fiscal cliff but still face tax abyss

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The tax-code changes passed last week by both houses of the U.S. Congress would have sent American horseplayers flying off a fiscal cliff had it not contained an exemption allowing them to continue deducting gambling losses against winnings regardless of new caps on itemized deductions.

The National Thoroughbred Racing Association deserves credit for lobbying for that reprieve, but its work in this area is not done. The Internal Revenue Service’s policies toward taxing gambling proceeds remains blatantly unjust and in need of reform. The continuing failure of the racing industry to change the fundamental problems with the tax code is costing it hundreds of millions of dollars a year in lost business.

The tax laws for racetrack gambling proceeds have changed little since the bygone era in which they were created, when the $2 bettor was the backbone of the industry and the most exotic wager was a daily double. It may have seemed reasonable then to consider a wager that paid more than 300-1 a lottery-like windfall to which the authorities had to be alerted. Today, however, with grandfather’s win-place-show bets accounting for less than a third of the handle, most players are regularly pursuing those higher-risk/higher-reward wagers, and getting themselves into tax trouble the moment they succeed.

The basic problem is that gross receipts, not net winnings, are considered income by the government. To keep things simple, let’s take the hypothetical case of a bettor who puts exactly $100,000 a year through the windows and gets back $95,000 for a net loss of $5,000. He’s enjoying himself and his hobby, is one photo-finish away from a winning year, and is beating the takeout. He, of course, should have no additional tax liability.

If that $95,000 in returns all came on bets that paid $602 for $2, though – payoffs that once were outlandish but that now are posted in almost every race on trifectas, superfectas, pick fours, pick sixes, etc. – his trouble is just beginning.

The IRS has been informed that he has additional “income” of $95,000. In theory, he can offset that by claiming an itemized deduction for $95,000 in gambling losses, but only in theory. Even with the exemption for this deduction – without it, his $95,000 would have been reduced depending on his income – he doesn’t really receive the full benefit of it, for three reasons. First, the insistence on calling gross receipts “income” probably kicked him into a higher tax bracket. Second, most states already have limits on the percentage of federal itemized deductions that can be applied to state taxes, so he’ll have to pay a state tax on his phantom gambling profit. Finally, the increase in his so-called income may subject him to an Alternative Minimum Tax, nullifying his wholly legitimate deduction.

Depending on his overall tax situation, our hypothetical $5,000 loser could be subject to an additional $5,000 to $35,000 in additional taxes on his non-existent “income.” Now, he’s losing $10,000 to $40,000 for the year on a hobby that doesn’t seem all that much fun and may well have become unaffordable, driving him permanently from the game.

It’s easily fixable. The best change would be to alter the definition of income from gross receipts to net winnings and the problems go away. Short of that, at least the current threshold triggers for reporting and withholding could be increased. Another helpful change would be to redefine the “base bet” amount used for those triggers to be the actual amount of the wager rather than $2. If someone plays a $32 trifecta or pick-four partwheel, the trigger should be 300-1 on $32, or $9,600, rather than pretending the player made only one winning $2 bet.

Pretending that someone who loses $5,000 in a year has actually realized $95,000 in additional taxable income is a cruel charade – an expensive one not only for taxpayers but for the nation’s racetracks. These and other tax burdens, such as the requirement for 25 percent withholding on payouts of $5,000 or more on 300-1 payouts, take massive amounts of money out of circulation that would otherwise be recirculated through the parimutuel windows.

Returning this money to bettors would spark a dramatic increase in annual handle that no marketing program will ever achieve, yet this issue remains low on the list of priorities among industry organizations. This is particularly mystifying because unlike the takeout decreases so many track operators stubbornly resist, there is no short-term revenue loss to fret about – just immediate handle gains and fairness for the customers.

Bob Lord More than 1 year ago
Mr. Crist, why do you say horse players avoided the fiscal cliff? They clearly did not. Let’s say I have $100,000 in winners and $100,000 in losers and I have $500,000 of other income and a whole bunch of other itemized deductions. You're correct that I can’t lose my deduction for the losses, but the winnings still increase my adjusted gross, which in turn limits the other itemized deductions I am able to claim.
Patrick Henry More than 1 year ago
Good catch. The Pease limitations on itemized deductions being reinstated for 2013 can turn a losing year into a taxable event.
Bob Lord More than 1 year ago
Thanks, as was yours on the seniors. But that same senor you depicted with 10K of winnings and 10K of losses would get just as bad a tax result if he had 20K of losses and only 10K of winnings. If you think about it, what these rules do is punish you not so much based on how much you win, because most of us won't have net winnings in a year, but on the frequency with which you bet. If I place one bet in the entire year, a $3000 winner, and you hit the track every day, winning $100,000 but losing the same $100,000 plus another $10,000, you get hit worse taxwise than I do, even though you lost and I won.
Patrick Henry More than 1 year ago
Steve, The insistence of calling gross receipts income does not matter in determining your tax bracket. It is all based on taxable income. Also, AMT is not a problem for gamblers deducting losses as an itemized deduction. One of the worst outcomes is for certain senior citizens who don't itemize and also receive social security. If their income does not meet certain thresholds they do have to pay tax on their social security income. However, let's say that they had winnings of $10,000 and losses for $10,000 during a year. A net zero but it might cause their social security to become partly taxable and they wouldn't get the full benefit of an itemized deduction. A daily double you wouldn't want to hit.
Bob Nastanovich More than 1 year ago
Simply, there should be no taxation of gambling winnings. That is how it is done in the U.K.
cmoney404 More than 1 year ago
Seems to be alot of misinformation in these comments. Las Vegas (or any casino) is EXPRESSLY immune from reporting winnings on table games (net, gross, whatever). They do, however, have to follow the same 300-1 rules when it comes to slots or horse payoffs. I don't think that Steve is advocating any type of tax evasion. Instead, I think he is pointing out that it isnt fair that this problem exists to begin with. I have three IRS tickets this year. I definitely have a net loss. Instead, I have to deal with it on my tax return. Two of those tickets were with friends at the Derby and Breeders' Cup. I have agreed to take responsibility fully. I am more than a little nervous about how it is going to shake out. These friends never bet horses. I included them as sort of a "buddies" thing. We had some beer and laughs. They didnt even believe me when I told them we had to deal with taxes. They routinely frequent casinos and win and lose sums of money that pale in comparison to our winnings those two days. They never have any tax burden to deal with (filing and claiming losses, etc). I could see that they were understandably turned off by the entire thing..... And these are males, 35-50. Love to gamble and have fun. They were turned off by the whole thing. Not good. They are not tax cheats. They, just like everyone else, lose at the casinos. It's entertainment. His point is that the threshold is just too low. It puts these tax filing requirements on people when the winnings arent big enough to have guaranteed a profit for the year. It's a shame, really. Just look for the IRS window after the Derby. It is full of drunk young people who are about to be in for a shock because they hit a 602 trifecta on the big race. If they were playing blackjack or betting sports in Vegas, they could have just cashed out and stumbled up to bed - end of story. It isnt fair.
russell More than 1 year ago
Yup, that what I thought and you made the point I was trying to make. My first IRS tix was in the Derby, Lil E Tee and Casual Lies exacta that paid 2.5k in NY.
kingsailor2 More than 1 year ago
I've often wondered why the Las Vegas casinos don't lobby for a change in the IRS reporting, and allow you to pay taxes on your net winnings, instead of getting bumped (potentially) into a higher tax bracket. They surely have more pull than straight out horseplayers and the most powerful senator in the land to boot. If they can't make it happen, it's not gonna happen.
Carol Gladfelder More than 1 year ago
Yes, but that "MOST POWERFUL SENATOR" fully supports raising taxes. And not just on millionaires & billionairs; as he loves to say. He & his "chief" have a love affair with raising taxes to pay for their out-of-control spending. Until the general public starts to wake up and face what is really going on, then none of this will change. Therefore, will EVERYONE please face reality before it's too late. He & his liberals are making fools out of all of you. Quit letting them get away with it.
lovethoseknicks More than 1 year ago
There is a much easier solution to this problem for horse players. Stop bucking the higher takeouts of the exotic pools and go back to playing win, place, show, and non tax double and exacta combinations when appropriate. The idea is NOT to make the biggest possible one time score so you have bragging rights. The idea it to profit. It's just as easy in the win, place, show pools because of the lower track take.
cmoney404 More than 1 year ago
The effective takeout on the multirace exotics is lower than on WPS. Read Crist's book.
Carol Gladfelder More than 1 year ago
I have been working in the Horse/Greyhound Industry for roughly 13 years. With all due respect, you don't know what you're talking about. I honestly don't mean to sound so rude. But to make a long story short; you are about 95% incorrect. This industry has suffered for the following reasons: #1, competition. Casinos have been popping up all over the country. However, those casinos are only allowed to be owned by NATIVE AMERICANS; which is B.S. #2 - video poker, Keno, etc.. #3 - yet again, "HIGHER TAXES" & "GOVERNMENT REGULATIONS" that are bankrupting race tracks. (also bankrupting many other industries) Very sad. In the past; horse & dog racing was alot of fun for people who either just went to the track once in awhile to have some fun. Or for the serious gamblers who were there to make money. Now, the Government & Political Correctness (indian casinos) are hell - bent on destroying the industry. So the tribes get; OH, I don't think that I need to elaborate any further. EVERYONE knows what is going on.
John Murphy More than 1 year ago
All that advice and there's no mention of the way it's really supposed to work. You are supposed to report ALL of your gambling winnings, not just the winnings reported to the IRS. You can subtract ALL of your wagers, and pay taxes on the profit. I have had 5-10 IRS tickets a year for 40 years. I've always kept all my losing tickets, programs and a log of my daily activity. It's even easier to do this today because I bet mostly at home and the website keeps track of everything. I have been audited twice (not since 1982, by the way) and passed with flying colors. At my last audit (in Baltimore) the agent told me "I do all the IRS audits and I've never seen anything like this. Most of the audits are little old men with one IRS slip and a bunch of losing tickets they picked up off the floor that have shoeprints. No one has ever had a losing ticket that predates the IRS slip." So get with it, Steve, and all your followers. Report everything and then you don't have to worry about the IRS tickets, and you will be LAWFUL. You will pay not a penny more or a penny less than you are supposed to. Let''s be honest, though. What Steve and everyone else would like to to have NO IRS report and then nothing will ever get reported. Nothing. You want to live in the shadowy world of the track and stay completely off the radar. On another note, the "kick into a higher tax bracket" is a phony issue. The implication is that the additional track income will cause you to pay higher taxes on your other income, but that is not how tax brackets work. You only pay the higher rate on the marginal income in the higher bracket. One more thing. According to Steve, if I play $2 and hit a $5000 pick six, I should pay taxes and if he buys $2,000 worth of combinations and hits it he should not? Ha!
Andrew More than 1 year ago
Get a clue John Murphy. Did you even read the article? Or do you not understand the article?
John Murphy More than 1 year ago
All that advice and there's no mention of the way it's really supposed to work. You are supposed to report ALL of your gambling winnings, not just the winnings reported to the IRS. You can subtract ALL of your wagers, and pay taxes on the profit. I have had 5-10 IRS tickets a year for 40 years. I've always kept all my losing tickets, programs and a log of my daily activity. It's even easier to do this today because I bet mostly at home and the website keeps track of everything. I have been audited twice (not since 1982, by the way) and passed with flying colors. At my last audit (in Baltimore) the agent told me "I do all the IRS audits and I've never seen anything like this. Most of the audits are little old men with one IRS slip and a bunch of losing tickets they picked up off the floor that have shoeprints. No one has ever had a losing ticket that predates the IRS slip." So get with it, Steve, and all your followers. Report everything and then you don't have to worry about the IRS tickets, and you will be LAWFUL. You will pay not a penny more or a penny less than you are supposed to. Let''s be honest, though. What Steve and everyone else would like to to have NO IRS report and then nothing will ever get reported. Nothing. You want to live in the shadowy world of the track and stay completely off the radar. On another note, the "kick into a higher tax bracket" is a phony issue. The implication is that the additional track income will cause you to pay higher taxes on your other income, but that is not how tax brackets work. You only pay the higher rate on the marginal income in the higher bracket. One more thing. According to Steve, if I play $2 and hit a $5000 pick six, I should pay taxes and if he buys $2,000 worth of combinations and hits it he should not? Ha!
russell More than 1 year ago
Question for whoever may know; Mr "Whale" flies into a Vegas hotel and playing baccarat or craps nails the casino for $1 million. The casino clearly knows how much he won. Does the casino notify the IRS or state of his winnings?
Tekov Yahoser More than 1 year ago
I have an idea that might appeal to both players and the vultures. ( I had the misfortune to be audited on my play due to about $40,000 in IRS tickets but had a slight loss for the year. They kept saying that I WON $40,000 and I said I LOST money and I had the "Youbet" excel spread sheet that showed every wager I made and they still dinged me for a couple of grand.) Anyway, I propose a "W2-EG" (electronic gaming). Allow tracks and casinos the OPTION of tracking player wagers via a player's card that would be filed at years's end. Said card would need to document every transaction with daily , weekly, monthly and yearly summaries. This net figure (if won) could be listed as "net winnings" on page 1 of the 1040. Obviously if you lose, it's a moot point.
David G. More than 1 year ago
Tekov, it's funny you mention that because on the instructions on the Form W-2G, it advises the payor of the winnings to report the winnings less the wager made. However, I've received a W-2G from the defunct ADW hub Youbet.com for hitting a trifecta that paid $601.20 on a $2 wager.