The Real Gamble is not Paying Taxes on March Madness Windfalls
March Madness’ bracketology is a hotbed of betting with an estimated $2 billion bet in 70 million brackets. Whether from an office pool, in Vegas or somewhere else, taxpayers who win, big or not, need to report their winnings as income to the IRS. Even winners of noncash pools could have tax consequences, making “bragging rights” the only nontaxable prize this March.
Size of prize doesn’t matter to the IRS
No matter the amount, gambling winnings are fully taxable. The larger the prize, the more likely the winner – and the IRS – will receive a tax form reporting the prize, like a 1099-MISC or W2-G. The IRS will be able to compare the information on the taxpayer’s return with the tax form reporting gambling winnings. For this reason, failing to report the prize as income is the surest way to get audited.
Just because a taxpayer doesn’t receive a tax form does not make the winnings tax-free. Taxpayers still have a responsibility to report their prize on their tax return as “other income.”
And noncash prizes don’t escape the IRS’ interest, either. If it is a trip or just a coffee maker or gift card, winners should include the fair market value of any noncash prizes in their taxable income.
March Madness prizes are taxed even if they aren’t from gambling
Employees at billionaire Warren Buffet’s Berkshire Hathaway subsidiaries aren’t exactly betting in this year’s largest office March Madness bracket. Although they don’t have to pay to enter the office pool, someone could win the $1,000,000-a-year-for-life award nevertheless. In addition to $1 million taxable income a year for the rest of their life, the winner can also count on a 1099-MISC – and payments reduced by a tax withholding, currently 25 percent – for the rest of their life.
Only winners can deduct March Madness losses
Gamblers may deduct their losses, but only by as much as they report in winnings. So if a taxpayer entered two pools – one at the office and one among friends – at $10 each and won $100 from their office pool, they could net the entry fee from the winning pool against the income, reporting $90 in winnings. The entry fee from the losing pool and any other gambling losses would be deducted as an itemized deduction if the taxpayer itemizes deductions, up to a maximum of $90.
Two wrongs don’t make a right: illegal betting and tax evasion
Illegal gambling doesn’t make the winnings tax-free. Taxpayers who make illegal wagers and win still need to report the income on their tax return. If the taxpayer itemizes deductions, they can still deduct the loss to the extent of gain.
People tend not to think of money won from their friends or co-workers in a pool as income, but it is. And because it is income, money won this March Madness needs to be reported on the tax return.
Santa Claus exists – of course – and even he must pay taxes and so do other holiday seasonal workers
Taxpayers should be careful when considering giving other tax benefits. In some cases, careful tax planning can reduce or eliminate negative tax effects.
Find out how to exactly document any crowdfunding income from this year on a 1099-K form to avoid last-minute penalties.