By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
Whether you won or lost on Super Bowl Sunday, your gambling wager has tax and IRA planning consequences.
Super Bowl XLVII was held in New Orleans this past Sunday. After San Francisco played a “lights out” second half after the lights went out, the Baltimore Ravens held on to win the game 34–31. Although Baltimore won the game and got to raise the coveted Vince Lombardi trophy, it wasn't the only winner this past weekend. In fact, millions of Americans became winners themselves as a result of legal and illegal gambling.
The Super Bowl is the most bet on sporting event in the world. You can bet on the obvious, such as which team will win, but that’s far from the only way you can place. This year, so-called “prop” bets included yearly favorites, such as “Will the pregame coin flip turn up heads or tails,” as well as Super Bowl XLVII specific wagers, such as “Will Beyoncé’s hair be straight or curly?” Regardless of the type of bet you placed however, there are certain tax rules you should know.
Let’s start with those who had bad news first. If you lose money gambling, you may be able to claim the loss as a miscellaneous itemized deduction on your tax return. Since the deduction is an itemized deduction, it can only be taken if you itemize your deductions, as opposed to taking the standard deduction. Furthermore, the only income this deduction can offset is other gambling winnings. About the only good news you might have if you are trying to claim a gambling loss deduction is that unlike many miscellaneous itemized deductions this one is not subject to the so-called 2% floor.
Okay, enough of that. Nobody likes to talk about the bets they lose, so let’s move on and talk about the rules if you won money. The first rule to know is that regardless of where you placed your bet and how it was placed, if you won money on a Super Bowl bet, it’s taxable. Gambling income is considered ordinary income and is taxable at ordinary rates. If you placed your bet through legal avenues, such as through a licensed casino, depending on the size of your bet and a host of other factors, the casino might issue you a W-2G and/or withhold some of your winnings for federal income taxes. If, on the other hand, you place your bet via a more “friendly” (a.k.a. illegal) method, your winnings are still technically taxable. The tax code provides that all income from any source is taxable unless there is a specific exclusion. Not surprisingly, there’s no such exclusion for illegal gambling.
Some people might make the mistake of thinking that just because they’re paying tax on their gambling winnings they can use these winnings to make an IRA or Roth IRA contribution. That is generally not the case. IRA contributions must be made using income that qualifies as “compensation” under the tax code. Compensation includes wages, self-employment income, taxable alimony, but it does not include gambling winnings. In fact pretty much the only way you could use gambling winnings to make an IRA contribution is if your occupation was a professional gambler. Now is not the time to get into specifics on that, but suffice to say that doesn’t include too many people. Plus, although you could use gambling winnings to make an IRA contribution if you are a professional gambler, your net profit at the end of the year, before your IRA contribution, would be subject to self-employment tax. That end result would likely favor IRS and not you.
So there you have it, your game plan for dealing with the tax consequences of your bet on the big game. If you lost, don’t feel too bad. Super Bowl XLVIII will be here before you know it. It will be held in New York, so it’s a good bet it will be freezing. If you won, enjoy your winnings, but don’t get too excited. Much like the IRS and your taxes, when it comes to gambling, the house usually wins.
1. If you lose money gambling, you may be able to claim the loss as a miscellaneous itemized deduction on your tax return
2. regardless of where you placed your bet and how it was placed, if you won money on a Super Bowl bet, it’s taxable
3. Unless you are a professional gambler, you can not use gambling winnings to make an IRA or Roth IRA contribution