Sports Betting - Should I Itemize Deductions?

Here's some of the information I've gathered about taxes and sports betting/casino winnings for 2021. Main focus will be on the state of Michigan.

Disclaimer: I am not a tax expert and this is not professional financial advice. I highly recommend consulting with a CPA for your individual tax responsibilities.

What almost was

     Initially, the state tax laws (as they were written) required gamblers to report all winnings as taxable income. In other words, if you had winnings of $100,000 but actually lost $1,000 on the year, you were expected to claim that $100,000 as income! Gambling losses were not able to be deducted at the state level, even though the IRS allowed it on your federal return. Myself and many others had been uneasy about this from the beginning, and I really didn't know what to tell people.

     Fortunately, the Michigan legislature recently passed a law that fixed this problem. As of last week, Governor Whitmer has officially signed the bill and we will now be able to subtract losing wagers from our total winnings, as long as you itemize deductions.

The state income tax rate in the state of Michigan is a flat 4.25%. We are going to have to pay this rate. Read further and see the example at the bottom to see how much exactly we'll have to pay.

 (Link to full text of the bill here if you're into legal stuff)

 

General tax info

     In the US, any income you make in a given year needs to be claimed on a federal tax return. Most people take what's called the standard deduction, which for 2021 is $12,550. This means that if you make $50,000 in total income for a year, your taxable income is only $37,450 after the deduction is applied.

     I'll spare you guys my rant on marginal tax brackets but a lot of people don't understand how they work. Here's another LINK for more info if you're not quite sure.

     On the other hand, you can itemize deductions.  For a lot of people, the standard deduction is nice because it's convenient, saves you money, and generally makes the tax process very simple.

     For gamblers, however, the standard deduction doesn't make much sense. If you've been following this page/Twitter account all year, you have MUCH more than $12,550 in "losses".  Even though our winnings are much higher ($17,380 in sports betting profits alone), we would end up with a mind-boggling tax liability. Therefore, all Promo Guy followers should look into itemizing deductions.

Quick story to explain why you should itemize: DraftKings had a promo earlier this year where you could play $20,000 of roulette and receive $2,000 in credits. Throughout the promotion, I broke even and had both "winnings" and "losses" of about $10,000. After the credits, I profited about $1,500. However, if I took the standard deduction without itemizing, I'd be liable to pay taxes on the full ~ $11,500 in "winnings", even though it wasn't my total net profit. Every winning spin counted towards my "winnings", but for tax purposes, the losing wagers technically didn't matter!

 

How to itemize deductions

     My first advice here is to talk to a CPA. I'm a big fan of doing my own taxes, but those days are long gone now that betting is legal. Ask someone you trust to recommend you a tax professional who knows what they're doing and get some help.

     I have a spreadsheet linked in my Twitter bio that I highly recommend - in addition to being a good idea to track all your bets, it should make the tax process much easier.  Once you have all your income entered from your day job, your real work begins (or your CPA's). The sportsbooks may send you tax info, but they also might not. I haven't been able to find a good answer to whether they send detailed information or not.

     With that said, let's talk about itemizing.  You must enter all gambling winnings as "Other Income" on your Form 1040 (note: this is going to be a VERY big number).  Whereas most people take the standard deduction of $12,550 and call it a day, that's not going to be enough for us.  You're going to need to go through your losses and document them on a form called "Schedule A 1040".  You can deduct your losses up to the amount of your winnings, but no higher

 

What can be itemized?

  • Gambling losses
  • Mortgage interest paid
  • Charitble donations (DM me if you need any suggestions of quality charities - I have lots of recommendations!)
  • Other specific expenses that I'm not quite sure about

If nothing else, itemizing might lead you to making some donations that you otherwise wouldn't have, so I'm all for it!

 

Example: Standard deduction v. Itemizing

     Let's do a (highly simplified) comparison of a potential @PromoGuyMI follower's tax liabilities and see which method comes out ahead. We'll call him Steve.

     Steve is from Michigan and followed @PromoGuyMI in January 2021 when betting was legalized. He signed up with all the links and promo codes and tracked his bets in the spreadsheet.

2021 stats:

  • Income from day job: $50,000
  • Winnings: $100,000
  • Losses: $80,000
  • Net profit from betting: $20,000
  • Total net income (job + betting): $70,000

If he takes standard deduction:

  • Total taxable "income": $50,000 (job) + $100,000 (betting wins) - $12,550 (standard deduction) = $137,450. Note that he cannot claim his losses if he takes the standard deduction!
  • I'll spare you guys the calculations, but based on marginal tax brackets, Steve's total federal tax liability is $27,021
  • Based on the Michigan 4.25% flat tax rate on income, Steve's total state tax liability is $5,841
  • Unbelievably, Steve would owe over $32,862 in federal + state taxes if he used the standard deduction!

 

If he itemizes deductions:

  • Total taxable "income": $50,000 (job) + $100,000 (betting wins) - $80,000 (betting losses) = $70,000. Note that he is able to claim his betting losses in this case.
  • Based on marginal tax brackets, Steve's total federal tax liability in this case would be $11,148.50 after itemizing.
  • Based on the Michigan 4.25% flat tax rate on income, Steve's total state tax liability is $2,975 after itemizing.
  • After itemizing deductions, Steve would owe $14,123.50.
  • By itemizing, Steve saved almost $19,000 in taxes!

 

TLDR: Summary

     The main takeaways you should get from this little writeup:

  • You WILL have to pay taxes on your gambling winnings, so start a separate account in which you save a portion of your profits for tax time. SoFi is an awesome online bank that I find super useful. Their debit card reimburses ATM fees worldwide, so if you're a traveler this is a no-brainer anyways. DM me on Twitter for a referral.
  • Itemizing deductions is the ONLY way to file taxes as a sports bettor. See example above for a good representation.
  • DM on Twitter or comment below with questions and I'll try to be as helpful as I can!
  • I am not a tax professional - always consult a CPA when making financial decisions.

 

Last thing: do me a favor and take a look at the sportsbook offers on the right-hand side of these page. Using the links and codes really helps me out and is a great way to get started on a new site. The more apps you have, the more you can profit from signup bonuses and different promos!

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