In Part 1 we looked at Federal Tax Implications for Casual Gamblers. Here, we will address the tax implications for casual gamblers living in New England and explore the Session Method.
Part 2: State Tax Implications for Casual Gamblers
Maine
In Maine, the income tax return starts with Federal Adjusted Gross Income (AGI), so federal itemized deductions aren’t included—all gambling winnings are included, but losses are not. Itemized deductions are phased out beginning at $91,500 for single and married filing separately, $137,300 for head of household, and $183,050 for married filing jointly. This was the issue in a recent case before the Maine Board of Tax Appeals. In this instance, a taxpayer had gambling winnings of $150k and losses of $200k, for a net loss of $50k. Because of her gambling winnings, her AGI phased her out of all itemized deductions and the taxpayer was not allowed to deduct any of her losses.
Massachusetts
In Massachusetts, gambling losses can only be deducted for state income tax purposes if the losses were incurred at any gaming establishment licensed under Massachusetts law, and only to the extent of winnings in a gaming establishment licensed under Massachusetts law. This means, if you prefer to do your gaming in an out-of-state establishment or through a sports book not licensed under Massachusetts law, your losses are not deductible.
New Hampshire
In New Hampshire, your winnings won’t be taxed at the state level because there is no state income tax.
Vermont
In Vermont, income derived from wagering transactions made within the State of Vermont shall be considered taxable Vermont income regardless of the individual’s residency status. Vermont Department of Taxes may require taxes to be withheld from proceeds. Also of note, professional gambling is currently illegal in Vermont. Until sports betting legalization, only nonprofits could operate games of chance. Expect a decent probability of state income tax policy on gambling winnings to be examined (or scrutinized) after the recent legalization of sports wagering. Because Vermont uses Federal AGI as the starting point of the return and has few exemptions or subtractions from income allowed, gambling losses may not be deducted from AGI, meaning Vermont taxpayers will be paying state income tax on gross winnings without being able to deduct losses for state income tax.
Connecticut
Connecticut is similar to Vermont in that gambling losses are not deductible for state income tax for residents. For part-year residents who meet the gross income test ($15k single, $24k joint, $19k HOH, $12k MFS), income is taxable in Connecticut to the extent that AGI is apportioned to Connecticut during the residency portion of the year. For non-residents, winnings are not subject to Connecticut income tax.
Rhode Island
In Rhode Island, gambling losses are not deductible. Federal AGI flows to the first line of the state income tax return, and Rhode Island Schedule M has nowhere to deduct gambling losses.
The Session Method
Professional gamblers may be able to deduct losses on a business income tax return or Schedule C, but status as a professional gambler is aggressively challenged by some states. This method of filing provides obvious shortfalls in terms of state taxation and potential effects to AGI. There is a more tax-efficient method of reporting gambling income, known as the session method. However, the session method requires strict documentation and a conversation with your CPA.
The session method of tracking gambling income/losses allows for individuals to net each gambling session and report the net amount from each section as an above the line deduction, which could have a lesser impact on AGI as well as state taxation. Specifically for slot machines, under IRS Notice 2015-21, taxpayers could net and track their winnings and losses per session of gambling. For example, a player may sit down at slot machines in Casino A at 9:00 AM, using an initial wager of $200, and play similar slot machines with just the money from the initial wager until lunch time, at which point the session ends. Over the course of the session, the player may have won $1,000, but lost $800. The session method would report the net $200 winnings on 1040 Schedule 1, line 8(b), while the standard method of reporting would have a W-2 G of $1,000 reported on line 8(b) and $800 in losses on Schedule A. The session method would result in a $800 difference to AGI in this scenario. Net session winnings and net losses would still need to be separately reported on Schedule 1 and Schedule A.
It is important to note that a session is understood to be a continuous, uninterrupted gaming session at a single gaming establishment.
Rev. Proc. 77-29 states that a taxpayer must keep an accurate log or other similar record of all losses and winnings. According to the above, records should contain date and type of specific wager or wagering activity, name and address or location of the gambling establishment, the names of other persons present at the gambling establishment, and the amounts won or lost. As discussed in Part 1, the reporting thresholds for W2-G may or may not include items like your wagers and may just report gross winnings. As you can guess, the discrepancy between total W-2 G earnings and reported earnings could vary greatly and may trigger a notice of deficiency for unreported gambling income. To use the session method, strict records must be kept and maintained for inspection.
Some have reasoned that the session method could apply to other methods of gambling as well, but there is no authoritative guidance at this point. If you are considering the session method of accounting for gambling, it is best to have a discussion with your CPA upfront so that you understand the record-keeping requirements and the risks associated with this method.
Looking Ahead
Games like daily fantasy sports are somewhat controversial as to whether they are gambling (games of luck) or games of skill, with many jurisdictions nationwide exempting daily fantasy sports from gambling regulations as a game of skill. With sports betting and online gambling becoming more prevalent, it’s likely that states and the IRS will be examining their laws closely to adapt to the changing environment. ARB will continue to monitor and provide updates on the federal and state tax implications for casual gamblers. For more information, or if you have questions, please contact Rob Gould-Wetmore at ARB.
