The State of Illinois Feeds at Trough Twice on Big Slot Payouts

Q. For those who don't know, IRS Form W-2G is used to inform the IRS of winners of amounts of $1,200 or more on slot machines.

However, since slot machine gamblers often lose money in the course of winning money, the IRS allows itemized deductions for substantiated losses up to the amounts won, using Form 1040, Schedule A, Line 27.

That's the way the federal tax code works, but that's not the way it works in Illinois for the state income tax. The Illinois tax code does not provide for itemized deductions, so Illinois income tax is due on all gambling winnings, regardless of amounts lost.

Assume, for example, a slots player with $50,000 in W-2G amounts won, and $55,000 in amounts lost - not far-fetched since many slots players tend to replay or recycle amounts won. A tax-neutral situation? Wrong.

Although the net loss was $5,000, the tax consequences are as follows:

• Additional Illinois income tax, 3 percent of $50,000 = $1,500.
• Additional federal income tax on 85 percent of Social Security benefits - if retired, minimum = $1,275.
• Additional federal income tax, reduction in itemized medical deductions - if retired, minimum = $563.
• Total potential taxes on top of gambling loss = $3,338.

Conclusion: In Illinois, if you lose money playing the slot machines, you still might pay additional taxes.

Donald A. Jacobson,
Certified Public Accountant,
Chicago

A. To start, let's clear up a couple of minor points. The above scenario applies only to jackpots of $1,200 or more. On such jackpots, casinos are required to file form W-2G with the IRS, and players are required to show identification and sign the forms before they get their money.

With smaller wins, such forms are not required. That's taken into account in jackpot size on some machines. On a quarter video poker machine, the top jackpot usually is 4,000 coins, or $1,000, well below the IRS threshhold. Some machines boost the jackpot to 4,700 coins. Why such an odd number? Because at $1,175, it doesn't require a W-2G, while 4,800 quarters, or $1,200, would kick in the IRS requirement.

It is possible to win large amounts of money without ever filing a W-2G. Players are responsible for reporting smaller wins to the IRS, but in practice few do. Most slot players lose far more overall than they win even on their big hits.

Now then, you are correct that there is an inequity in the Illinois code that leads to taxation of many slot players who lose money.

The picture gets even stranger when the state gaming tax on casinos is taken into account. Casinos must pay the state up to 35 percent of their gaming income, with no deductions for operating expenses. The casinos in Elgin, Joliet and Aurora all fall into the top 35 percent bracket.

Let's say that I play at one of the local casinos, and use your scenario. I collect $50,000 in jackpots of $1,200 or more that require W-2G filings. The rest of the time I'm gambling, I lose $55,000, leaving me with $5,000 in net losses.

My $5,000 loss is gaming income for the casino, and the 35 percent state gaming tax comes to $1,750.

But the state doesn't take into account my $5,000 in net losses. It ignores everything but the $50,000 in winnings, and taxes me $1,500.

So now the state has it both ways. It takes $1,750 from the casino. It takes $1,500 from me. I get it both ways, too - but not in a positive sense. I've lost money - much of which goes to the state - and then the state takes some more.

This was a small problem when casino gambling in the United States was confined to Nevada and New Jersey. Most slot players from Illinois were playing infrequently, on vacation trips. Hitting a jackpot large enough to require a W-2G was a rare thrill, a once-in-a-lifetime shot for many players.

Today, however, we have a large corps of regulars who play slots on riverboats. Some play monthly, some weekly, some even more often. For someone who plays often enough, W-2G jackpots are inevitable. There is no doubt in my mind that there are thousands of players every year who pay extra income tax to the state of Illinois even though they've lost money overall at the casinos.

Illinois has had casino gambling since Alton Belle opened in 1991. It's long past time the tax code was adjusted to take slot players out of double jeopardy.