For many problem gamblers, tax season delivers an unwelcome surprise: a hefty bill on gambling winnings they may no longer have. It’s also often the moment when friends or loved ones first learn the full extent of the gambling.
The problem usually comes to light after the government audits winnings reported by casinos or other gambling entities. “Some gamblers may even face criminal charges for not paying the government and may have already spent their winnings,” says Matthew Wildes, a tax attorney and CPA with Wildes At Law in Roseville.
Why Minnesota gamblers are hit especially hard
A major driver of these unexpected debts in Minnesota is the state’s alternative minimum tax (AMT). Unlike current federal rules, Minnesota’s AMT does not allow gamblers to offset winnings with losses. “AMT is based on gross income,” explains Matthew. “Once your income reaches a certain level, the state labels you a high-income earner, which limits your deductions.” The system, he notes, was designed back when gambling was still illegal in the state.
The impact can be devastating. “I once had a client whose winnings created a tax bill of about $100,000—more than his $70,000 in annual wages,” says Matthew.
Matthew is now challenging the law in court, arguing it violates Minnesota’s Uniformity Clause, which requires that taxpayers in the same category be treated equally. “Essentially, we’re saying the law discriminates against those with a gambling addiction,” he explains.
Strategies that can help
In defending clients, Matthew has identified ways to soften the blow. One is using the “session method” of accounting, an IRS-approved strategy that allows gamblers to report net results over a session—such as a day—rather than every single jackpot. For example, a gambler who wins big but also loses on the same day can report lower net winnings, reducing taxable income.
Casinos often track this information through player card systems. “Players who are registered with a casino usually have access to detailed records of their daily wins and losses,” Matthew says. “Having this documentation can reduce a gambler’s tax liability by thousands of dollars.”
Matthew keeps a record of which casinos provide these reports and urges clients to obtain them. “Getting this information on the front end is beneficial—whether you’re working with a professional tax preparer or trying to avoid problems that could escalate later,” he says.
In contrast to recreational gamblers, professional gamblers keep better records of daily wins and losses, lowering their tax bills. In fact, professional gamblers are not subject to the AMT law because, as a business, they can legally claim deductions for their losses. Matthew says that some gamblers try to fake being professional so they can take advantage of these benefits.
A call for fairness
Unlike criminal courts, where gambling addiction can sometimes reduce penalties or lead to treatment-focused alternatives, tax courts offer no such flexibility.
“From a public policy perspective, the Department of Revenue needs to be more lenient before cases like these go to tax court,” says Matthew. “There needs to be greater understanding of the hidden issues at play.”