If there is one subject that comes up quite frequently in the world of gambling, particularly with respect to high-limit slot and Video Poker Advantage Players and Recreational Players alike, it is that of paying taxes on jackpots. There is and has been some question of whether or not the effect of tax deductions should be factored into the value of the play, and as with most things gambling, I am here to opine.
The first thing that we should understand is that the tax laws currently call for a handpay (in the United States) of any win of $1200 (or more) on a slot or Video Poker game. Obviously, it's beyond my capabilities in a single article to give examples of the effect this may have for each individual tax bracket. Furthermore, I'm not an accountant or tax agent, but if this situation applies to you, I strongly suggest you talk to someone who is of one of those two professions.
The only question I am here to answer is whether or not this should be counted against the Expected Return of a play, and spoiler alert, my answer is no.
If you have a job, then you are likely accustomed to paying taxes on your income, unless you are among the lowest earners or have a plethora of off-setting deductions. For instance, if someone earns a salary of $100,000 a year and is asked his/her salary, does that person typically say, "$100,000 per year," or would that person quote a salary based upon any taxes and offsetting deductions that take place?
Like it or not, gambling wins constitute income, and that's not just true of jackpots. Strictly speaking, an individual should file a tax return on all gambling winnings and off-setting losses, and that individual should also have fairly detailed logs in order to back up same. While it is true that gambling losses in excess of wins do not (they should, if wins count) constitute a loss in income, gambling profits do constitute an increase in income.
For recreational players as well as Advantage Players, this log of gambling activities is going to prove extremely useful in the event of an audit. Furthermore, most recreational players are negative expectation gamblers, and as such, are very likely to generate a loss over the course of a year. (The likelihood depends on a number of factors such as House Edge, Variance and how much coin-in a person plays) In any event, most Recreational players will have gambling losses that exceed wins, unless they have the good fortune of hitting a tremendous jackpot.
Good try MegaBucks jackpot winner, that ain't getting written off.
For some recreational players, there is a minor problem if they are also low(ish) income earners. The problem is that such players will often not have gambling losses (and other deductions) in excess of the Standard Deduction. In the event that the Standard Deduction exceeds gambling losses plus other deductions, the individual in question will pay taxes on the gambling wins...generally.
Once again, this is where strong record keeping comes into play. I would obviously never encourage anyone to fudge their tax forms, but let's keep in mind that a player must file taxes on ALL gambling wins; this fact is actually beneficial for the person that is running into the standard deduction problem if he/she lost overall:
The reason this is the case is that the player can report ALL gambling wins and it is quite feasible that the off-setting losses will now exceed the standard deduction. In other words, unless everything that you did resulted in a handpay, if you have more in total winnings than the amount of the standard deduction, (and more in losses) then the losses can be used to offset, at this point, and your deductions might exceed the Standard Deduction. In many cases, this will result in paying less, or possibly even no taxes, on those winnings.
I cannot emphasize good record keeping enough; to simply have a piece of paper that states, "I won $12000 and lost $15000," is not going to be suitable. At a minimum, you would at least want to identify specific dates, perhaps times, the gambling establishment(s) you were at on those dates, the game(s) you played and the overall result of your play. It's possible that you would want to be even more specific than that. Again, I would never suggest that someone fudge these records, so keep good and honest records, and if taxes are due...just like any other American with a job and a large enough income...pay your taxes.
Do taxes affect the value of your job? Maybe they do, I don't know, but they are certainly inescapable to some degree when it comes to income taxes related to your employment. With that said, though, I do not personally view taxes as detracting from the value of a play. If you are gambling at a positive expectation, then a positive expectation is precisely what you have. Given the fact that a gambler is supposed to report any winnings that stem from the act of gambling, (not just handpays!) I can only conclude that if an individual wants to suggest that taxes on handpays diminish the value on those plays, then the taxes you should be paying on ALL GAMBLING WINS diminish the value of ALL POSITIVE PLAYS, and negative plays, as well.
Does everyone pay all of their due taxes on all gambling wins? Absolutely not. Does everyone keep detailed records of all gambling wins even when they do not receive a handpay? Absolutely not. Are there people that play an entire year receiving no handpays or currency transaction reports that do not mention gambling anywhere on their tax returns? It is almost certainly the case. However, if one endeavors to abide by the law, then all gambling winnings and losses must be claimed.
The IRS almost tacitly admits by way of having a required reporting threshold that players are not going to report all of their gambling winnings. Certainly, an individual with one handpay (all that is reported) for a given tax year is extremely unlikely to have walked into the casino and hit a handpay on one pull of the handle or press of the button. The IRS is essentially letting these people slide by only making them report the required wins...unless they lost money and are reporting the required wins only...then they are, in fact, hurting their own value.
Ultimately, if you play at a positive expectation, then the expectation is that you will win money (i.e. income) over the long run. Income gets taxed, but if you have an expectation of over 100% on your plays, then your income will actually be, well, your income.