March Madness and the IRS

March 14, 2012

The NCAA’s college basketball tournament — “March Madness” — has become an unofficial national holiday. Fan-in-Chief Barack Obama kicked off this year’s action by flying to Dayton (with British Prime Minister David Cameron!) for this year’s “First Four” tipoff games. And even people who don’t like basketball enjoy watching the tournament. This year’s top seeds — Kentucky, Syracuse, North Carolina, and Michigan State — will probably dominate coverage. But every year features at least one Cinderella team, waltzing up through the brackets with little more than heart. Who will it be this year? Creighton? Virginia Commonwealth? Or maybe NC State?

We all know college hoopsters don’t actually get “paid” (wink, wink). So the players don’t run up the score for the IRS — at least, not until they hit the NBA, where the average salary tops $5.15 million. (That suggests an average tax bill of a million and a half!)

But there’s one area where the IRS cashes in, and that’s the gambling. Vegas sports books report taking in $100 million during the tournament. But that’s just the tip of the iceberg. Recent figures show that more Americans participate in March Madness office pools than actually work in offices. Americans bet about $3 billion on pools sponsored by offices, bars, and clubs. And at least part of those winnings wind up in the IRS net.

Gambling winnings are taxable just like any other income. (The IRS doesn’t care how you make your money — they just want their “vig.”) Gambling losses are deductible as an itemized deduction not subject to the usual 2% floor. But — and this is a pretty important but — gambling losses are deductible only to the extent of gambling winnings. Win $1,000, lose $500, and you owe tax on the remaining $500. Win $500, lose $1,000, and your excess loss is worth about as much as a last-second brick when you’re down three points.

So, winners pay tax on their gains (wink, wink), losers cry in their beer over their losses, and March Madness is a bucket hit for the IRS, right? Well, maybe not so fast . . . .

Economists estimate that employees will spend 8.4 million workday hours watching the games. And those office pools, water-cooler conversations, and occasional hangovers will gobble countless million more hours. One research firm estimates the tournament costs the overall economy a whopping $1.8 billion in lost productivity (based on an $18 average hourly wage and 20 minutes lost per employee, per day). And much of that loss drops directly to the IRS’s bottom line. How many killer marketing campaigns are delayed because managers are busy checking each other’s brackets? How many millions of taxable commissions are lost as glad-handing salesmen sit around televisions instead of selling their stuff?

There’s not a lot of planning we can do for March Madness windfalls, simply because we can’t actually plan on winning. But what we can plan on is playing hard to help you keep what you win. So call us with your tax-planning questions. And good luck with your picks!