Effects of IRS Proposal to Lower Reportable Gambling Win to $600
The IRS has proposed lowering the amount that would trigger a tax reportable event from $1,200 to $600. This amount would be reported on a W2G. The winner must include these forms on his or her annual tax return.
The $1,200 slot and video poker win reporting was enacted by the IRS in 1977. The amount has not been adjusted for inflation since. The value of $1,200 in 1977 is now $4,627. Instead of making the appropriate changes based on inflation, the IRS has proposed making the requirement more burdensome on casinos and players.
Effect on Slot Players
The effect on middle stakes slots would be detrimental. A $1 denomination slot typically requires two or three coins for the jackpot. The progressive jackpot for three bonus symbols is often the only pay that triggers a reportable $1,200 win. If the $600 minimum becomes reality, any combination of wilds with a 7 or two wilds with a bar would trigger a tax form and hand pay on a $1 slot machine.
A $5 reel slot is far worse. A 60-1 pay would trigger a reportable win if the minimum is lowered to $600. This means any combination of wild multiplier symbols with bars will require a stoppage in play and a tax form. The $10 and higher machines would become completely unplayable due to the paperwork and hand pays.
Effect on Video Poker Players
Video poker becomes a serious problem at $.25 denomination and above if the new reporting proposed by the IRS becomes reality. The royal flush on a $.25 game with the max bet is typically $1,000. That amount is not reportable today, but it would be under the IRS proposal.
A royal flush already triggers a W2G on $1 machines with a max bet. These players are wagering $5 per hand. Four deuces in Deuces Wild, five of a kind on Joker Poker, and four aces with a kicker on Double Double Bonus would become reportable events on a $1 machine with the max bet.
A $5 denomination player would really start to feel the burden of the new reporting requirements. In addition to the four deuces mentioned in the $1 hands, a wild royal flush in Deuces Wild and a straight flush in Joker Poker are now reportable. All Four of a kinds and straight flushes would now get reported at $5 machines for games that do not use wild cards.
Forget playing the $25 denomination. A flush on most games would trigger the W2G on a $600 limit. A straight in Double Bonus and Double Double Bonus would, too. A $100 game would create a W2G for any hand of two pair or better with the max bet.
The heads up Texas Hold’em bots in Las Vegas would become unplayable, locking up after almost every hand at 20/40 and higher and some 10/20 hands.
Effect on Video Table Game Players
High limit video table game players will have their worst nightmare come true. Some players prefer these games in the video version. Some jurisdictions don’t allow real tables and must spread blackjack, roulette, craps, and proprietary games on machines.
A player that wagers $100 a hand on blackjack triggers the W2G by spitting a pair into three hands and winning because his $100 wagered on the three hands that gets returned is included in the $600 payout. A split creating a winning double down would also do the same thing. Half of the money being reported as taxable is the original bet under this scenario.
A winning $18 straight bet on roulette would require a W2G. A $20 long shot on video craps or Three Card Poker would have the same result. There are many scenarios where a video Ultimate Texas Hold’em machine could pay $600 in one hand.
A video table game sometimes freezes the entire table if one player requires a tax form, creating an inconvenience for everyone seated in the game. The solution would be to lower the maximum bet, something that will not make players or casinos happy.
Problems for State Video Lotteries
The maximum win for the video lottery in South Dakota is $1,000. In Montana, it is $800. Oregon caps wins at $600. The maximum win in West Virginia is more than $600 in many locations. These states would either be forced to lower the maximum payout or reconfigure systems to allow bartenders at neighborhood taverns to create W2Gs.
Can’t I Just Write Off My Gambling Losses?
While you should always consult a tax professional, the answer is probably no. Gambling losses are an itemized deduction. About 70 percent of tax filers take the standard deduction. The 2015 standard deduction is $6,300 for singles and $12,600 for joint married filers.
If a gambler would otherwise take the standard deduction, but has a W2G, the tax filer essentially pays taxes on the first $6,300 of that win (or $12,600 when filing a joint married return), regardless of any gambling losses. Most filers that use the itemized deduction carry a mortgage of at least $200,000 and write off that interest and/or make large charitable donations.
Of course, gamblers are required to declare all winnings and use losses to offset them, even if a W2G is not involved. The above is just an example of how a W2G may affect a player where all gambling wins are reflected on W2Gs.
Professional gamblers can file a Schedule C as a business and simply net the win or loss. That is a complicated process that only applies to a very small minority of casino players that have demonstrated a pattern of winning.
Gaming Industry Opposed
As the Las Vegas Review-Journal notes, casinos are opposed to this. Many gamblers play anonymously and purposely avoid games that may trigger a tax form. Those players would have to drop down in limits to accomplish the same goal.
Another issue is that having to report all these wins will require more slot attendants, computer terminals, and paperwork. Gamblers will become annoyed if the machines continuously lock up over marginal wins. More players that stay in the casino too long after a moderate win will leave with tax forms and no cash to show for it. Players in that example have yet another reason not to return to the casino.
Tourists from countries that do not tax gambling wins would go through a hassle to reclaim withheld taxes more often. This would become yet another reason to avoid international travel to Las Vegas, ultimately hurting tourism in the city.
Casinos near the Canadian border have the most to be concerned with these new rules. Canada does not tax recreational gambling winnings. Gamblers near Detroit may be inclined to travel to Windsor for a day of casino action. Those in Buffalo may think the other side of Niagara Falls is more appealing. Vancouver might become a more desirable destination for gamblers in the Pacific Northwest. The same goes for the Montreal area for bettors in New England.
There is little doubt that players that win amounts between $600 and $1,199 are long term losers. Discouraging that action may ultimately cost the IRS corporate income tax from the casinos if those gamblers stay home or decide to gamble internationally, on cruise ships, or at unlicensed offshore websites. Fewer gamblers would also hurt the tax base for states that depend on it.
The IRS should be adjusting its $1,200 threshold to match inflation, not discourage an activity that many states rely on for tax revenue and hundreds of thousands of employees depend on for their livelihood.