For the first time ever, the crown jewel of American sports, the Super Bowl, is only ninety minutes up the New Jersey Turnpike from the den of The Tax Warriors’ Philadelphia headquarters. How ironic it is that the big game, which brings gigantic revenues to local economies, is being played in the highest-taxed state in America—New Jersey? But beyond that, this year’s big game pits the Denver Broncos against the Seattle Seahawks in Super Bowl XLVIII. The big game has historically brought about friendly parties, great halftime shows, funny commercials, and of course, gambling.
The Super Bowl is one of the biggest gambling days of the year. According to the Nevada Gaming Control Board, sports fans bet $98.9 million on last year’s Super Bowl. This number does not include the numerous company “block pools,” bar room handshakes, and any other “backroom” methods of wagering bets. Fans love betting on the Super Bowl and depending on your wager, the pay-offs can be huge (and taxable) and the losses can be tax-deductible. One caveat before we get to some examples: We are discussing here the tax impact of winning and losing and are not addressing the legality of your particular betting venue--we leave that for the legal minds to determine.
In 2002, former Philadelphia 76er and NBA Hall of Famer Charles Barkley bet a whopping $550,000 on the 14-point underdog New England Patriots in Super Bowl XXXVI. The Patriots ultimately went on to upset the St. Louis Rams 20-17. The good news for “Sir Charles”: a cool $550,000 pay day. The bad news: TAXES! Yes, the IRS requires gambling and lottery winnings to be included in taxable income (yes, even those office pools).
What if Sir Charles had lost his wager? Does the IRS allow a deduction for gambling losses? Yes, the IRS allows gambling losses on Schedule A as an itemized deduction and the deduction is limited to the amount of gambling winnings claimed in income.
Let’s look at an example with 2014 tax brackets at the federal and state levels. Feeling lucky, Mr. Sherman R. Taxpayer decides to wager $550,000 on the Denver Broncos, who, as of early this week, are 2 ½ point favorites (according to vegasinsider.com). Further, let’s assume the Broncos defeat the Seahawks by 3 points, thus covering the 2 ½ point spread and grossing Mr. Taxpayer $550,000 in winnings. Mr. Taxpayer did not make any other bets during the year, and is a Pennsylvania resident. What are the income tax consequences of winning such a bold bet?
Mr. Taxpayer would pay $217,800 in federal income tax ($550,000 x 39.6%--the brand new high-income tax bracket ushered in via the American Taxpayer Relief Act of 2012. The same bet made in 2012 would have Mr. Taxpayer paying a mere $192,500 in federal income tax, putting an additional $25,300 in his pocket) and an additional $16,885 in Pennsylvania income tax ($550,000 x 3.07%) related to the wager. This would net Mr. Taxpayer $315,315 in cash winnings; a nice payout, but only 57% of the amount he would have paid if the Broncos had lost. When you win, Uncle Sam and the IRS wins, too! What’s that gambling proverb, “The Whitehouse always wins?” When you lose, you don’t get to deduct the loss unless you’ve won more than you’ve lost. So, Uncle Sam wins, even if you lose. Disheartening, isn’t it?
Whether you watch for the outlandish commercials, or because you have a vested interest in the game, the Super Bowl is a wonderful time of year. However, if you are one of the millions of Americans who gamble on the game, it is important to know the tax implications related to your wager. The Tax Warriors® at Drucker and Scaccetti understand the tax implications of gambling. And, while we don’t endorse gambling as a hobby, we certainly urge you to know what you are getting into before placing a bet.
Enjoy the Super Bowl XLVIII safely and responsibly with your friends and family. Root for your favorite team, stuff down the hot wings and beer and try not to lose your voice. After the game is over, know that we are here to help you with any tax-related matter, and we are always prepared to go the extra yard to help you secure your hard-earned wealth and income. That’s a sure and safe bet.