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State Tax Systems; Recreational Gamblers

December 30th, 2010 Leave a comment Go to comments

As a taxpayer should suspect, each and every U.S. state has some form of tax system.  What some might not know, however, is that not all states have personal income taxes.  Presently, seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) do not tax personal income.  Two others, New Hampshire and Tennessee, tax only dividend and interest income.  If you earn gambling winnings in any of these nine states, there’s no state tax burden.

If you are in Washington state and win money playing online poker, you have more to worry about than your tax burden:  It is a felony in Washington to play online poker for money. More on this to come.

What’s the deal with the other forty-one states that tax personal income?  First, let me remind you of the difference in federal income tax treatment between professional and recreational gamblers:

“Professional” gamblers report gambling winnings and gambling losses on Schedule C, Profit or Loss From Business, of the Form 1040.  The resulting net winnings amount, if any, is reported on line 12 of the 1040 as business income.  Recreational” gamblers report gambling winnings on line 21 of the 1040, and report gambling losses, up to the extent of gambling winnings, as itemized deductions on Schedule A of the 1040.

There’s plenty more to that issue, but it’s enough to know for purposes of this discussion.  “Recreational” gamblers are not treated the same among states.  Some states limit the extent to which gambling losses may be deducted to a greater degree than federal law.

Some states do not allow “recreational” gamblers to deduct gambling losses at all.  These states include: Connecticut; Hawaii; Illinois; Indiana; Massachusetts; Michigan; Ohio; West Virginia; and Wisconsin.  Other states simply place caps on the amount of deductible gambling losses, including Louisiana, Minnesota, and New York.

As you can see, whether you are a professional or recreational gambler, it’s important that your accountant not only understands how federal tax laws relate to gambling, but also how state tax laws relate as well.

Another important state tax issue to consider:  If you earn gambling winnings in one state (e.g. New Jersey), and reside in another state (e.g. New York), do you have to pay state tax in both states?  Check in next time for the answer.

  1. Daniel Ocean
    January 1st, 2011 at 20:08 | #1

    I guess in most cases its way more advantageous to file as a pro, especially if you live in states where you cannot deduct gambling losses.

    Ton’s of players are just ‘netting’ there income for the 1040 as opposed to posting ‘winnings’ and ‘losses’ separately. Thoughts? With the AMT, and rules on what is defined as a “session”, filing as recreational just isn’t worth it imo.

    Also, would like to hear about the WA/taxes in one of your upcoming blog posts. The WA DA has already mentioned that he wouldn’t prosecute any poker players, but should WA players pay taxes knowing that playing poker online is a class c felony?

  2. January 2nd, 2011 at 12:27 | #2

    Mr. Ocean,

    A common misunderstanding about the professional v. recreational dichotomy is that players think they can choose their status in order to minimize their tax burden.

    In fact, most players do NOT have a choice. The status is determined based on the player’s facts and circumstances. Generally, if you are gambling to pay your bills, you are considered a professional under the Internal Revenue Code.

    I plan to cover the iPoker ban in WA and possible legalization in other states in the near future.

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