Taxable Talk

Let's say you went to the casino last April, and were lucky, and won $1,000. Last August, you went to the casino, and you weren't so lucky, and you lost $1,000. What are the tax implications?

For federal taxes (IRS), you have $1,000 of other income (line 21 of Form 1040) and a $1,000 itemizable deduction on Schedule A (not subject to the 2% AGI limitation on itemized deductions). For federal tax purposes, this will likely have few implications for many Americans.

However, let's suppose you live in Illinois. Illinois' state income tax is more of a gross receipts tax—there is no deduction allowed for gambling losses. For the amateur gambler, you have $1,000 of gambling income in Illinois.

There are nine states that treat gambling in this manner. Here is a list of the nine states that gamblers should avoid residing in:

Connecticut
Illinois
Indiana
Massachusetts
Michigan (first $300 exempt)
Minnesota*
Mississippi
Ohio
West Virginia

Interestingly enough, Connecticut, Illinois, Indiana, and Mississippi all have casino gambling.

Minnesota is unique (as far as I can tell). Minnesota's standard income tax allows deductions for gambling losses. However, its' AMT does not, causing anyone with significant gambling losses to fall into Minnesota AMT. If anyone knows of any other states that don't allow gambling losses to be deducted on the state AMT, I'd love to know.

I'll point out that there are several states that don't have any state income tax (or just tax interest and dividends): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. That's one less form (or set of forms) to complete each year.

Florida has some unusual gambling laws. A court last year ruled that no-limit Texas Hold'em tournaments violated the law. On Friday, an appeals court ruled that the Florida Department of Pari-Mutuel Gaming erred in its decision that no-limit Texas Hold'em was illegal.

Interestingly enough, the original ruling hurt tax revenues. The appellate decision could be appealed, though, to the Florida State Supreme Court.

News Story: Sun-Sentinel

Renato Medina is the principal owner of Lucky Chances, a Bay Area poker club located in Colma. According to the US Department of Justice and the IRS, he allegedly caused Lucky Chance's to deduct $2.6 million in bogus business expenses, causing the government to lose out on nearly $1 million in tax revenues. Medina was indicted on conspiracy and tax evasion charges. Also indicted were his neice and nephew. All have been released on bond pending the trial.

Medina faces three counts of tax evasion, five counts of making false tax returns, and one count of conspiracy. If convicted on all counts, he could face 35 years in prison and fines of well more than $1 million.

Medina is the principal owner of Lucky Group, the holding company that owns Lucky Chances. The Lucky Group's website states, "The Lucky Group of Companies is committed to maintaining the highest ethical standards and demonstrating the highest personal standards of integrity at all levels, as well as a commitment to truth and fair dealing and complying with the spirit and letter of all laws and regulations wherever they conduct its businesses." Mr. Medina's attorney, Cris Arguedas, told the San Francisco Chronicle, "This is a simple tax case...[and Mr. Medina] asserts his innocence."

In a related story, two State Senate candidates are returning donations from Medina.

News Story: San Francisco Chronicle

That was the decision Iowa was faced with after the Iowa Supreme Court ruled that tax rates at race track (horse racing) casinos were unconstitutional in 2004. Today, Iowa is in the midst of a casino building boom, with four new casinos opening and many existing casinos undergoing renovations.

Of course, legislators when faced with a tax shortfall (or a tax being declared illegal/unconstitutional) try for some other means of raising the same revenues. Perhaps we can call it a "user fee." Maybe some video lottery terminals will raise some money. Or let's just add some casinos. I mean, can we actually consider cutting spending? Of course not.

The beneficiaries of this policy are obvious: the casinos, Indian tribes operating some casinos, the State of Iowa (those tax revenues are still flowing), and in one sense, the gamblers in Iowa. After all, with the renovations and new facilities, it's easier to gamble and it's more comfortable (or soon will be).

Of course, it's hard to win in most gambling, as the odds are with the house. You could try playing poker (several casinos in Iowa offer real poker). I'd advise reading a book first (shameless self promotion: I'm the co-author of a book on no-limit hold'em), as most poker players are losers.

So what's the moral of the story? In most jurisdictions, government will find a way to make sure those tax revenues keep coming in.


News Story: Des Moines Register

Iowa Supreme Court Decision
Roth Tax Updates Story on Iowa Supreme Court Decision