Daily Fantasy Sports Tax Reporting
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Hello RotoGrinders Community,
We hope 2017 treated you well. For those who had winnings from DFS, you will have to pay special attention to your taxes, as there was an unprecedented tax haul signed this past December. Keep in mind these tax changes will affect 2018 and beyond. For the upcoming tax season (2017 taxes), it is still standard operating procedure. In this article, we will touch on various issues that may affect your tax return. It is important to be proactive with your taxes, and it is advantageous to properly plan and understand your tax situation. If after this article you believe your tax situation is more complicated than you thought, please feel free to reach out to us for a free consultation.
At the onset of Daily Fantasy Sports, there was much debate as to what type of “activity” individuals are engaging in. The IRS determined that playing DFS was a game of skill and technical ability. Players had to develop a strategy, research athletes, and build a team that will gain the most points possible in order to win a “set prize.” Compared to gambling activities, where the IRS views those activities as a game of “luck,” winning an undeterminable amount (the professional gamblers in the community would disagree). This distinction caused DraftKings and FanDuel to mail out Form 1099-Misc to their participants. This opens up DFS income into a grey area of taxation. Is your playing style a hobby or full-time job/business? We will discuss further.
Note: You cannot write off gambling losses against your DFS income. They are two different activities with different tax rules. Sorry!
If you have winnings of over $600 from any daily fantasy sports site, such as FanDuel or DraftKings, you will likely receive a Form 1099-MISC with the amount shown on Box 3. It is advised that you report all earnings on your income tax return and not just earnings reported to you on a 1099-MISC or other tax forms.
Your winnings will be reported on Line 21 of your 1040 tax form as Other Income. This type of reporting is commonly referred to as hobby income. DFS players classifying their income as hobby income are not allowed to reduce their income/winning for expenses incurred or losses from one daily fantasy site to another. This type of reporting is typical for the casual DFS player. Expenses and/or losses are deducted on your Schedule A – Itemized Deductions and they are considered 2% miscellaneous expenses. You can deduct hobby expenses/losses up to your DFS income. Starting 2018, you will not be able to deduct hobby expenses.
Individuals who spend more time than the casual DFS player or who play professionally for a living typically report their DFS activities on Schedule C – Profit or Loss from a Business. This type of reporting allows the DFS player/business owner to reduce the income earned by expenses incurred or losses from one daily fantasy site while another daily fantasy site had winning/income.
So, how do you know which reporting is best/right for you? The IRS has several criteria under the Internal Revenue Code that helps distinguish the casual player/hobby from the professional player/business owner. We have developed a Tax Determination Questionnaire that will assist you in making this decision. Selecting the correct tax position is critical. Miss-steps could result in higher taxes, IRS tax notices and significant interest and penalties.
We believe that determining the proper tax position (casual vs. professional) is important but not as important as proactively tax planning throughout the year. Proper tax planning will lessen your tax burden and reduce your stress come tax time.
The new tax legislation will be beneficial to DFS players considered as businesses and detrimental for DFS players who consider their winnings as hobby. The below list is not an all-inclusive list of changes to the tax law; however, these are some of the biggest changes affecting personal income taxes:
NOTE: These changes will not go into effect until 2018’s tax season (filed in 2019).
1) Tax brackets – the top tax bracket was reduced from 39.6% to 37%
2) Standard deduction – has increased to $12,000, $18,000 and $24,000 for single, head-of-household and married filing jointly taxpayers
3) Personal exemptions – has been repealed/is no longer available. Taxpayers are historically used to getting a $4,150 reduction to their income for themselves along with spouses and children.
4) Child tax credit – has increased to $2,000 per qualifying child. The income phrase out has also been increased from $75,000 and $110,000, for single and married filing jointly taxpayers to $200,000 & $400,000.
5) Medical/dental expenses – remain the same for 2017/2018 as expenses paid in excess of 7.50% of AGI (adjusted gross income). The AGI percentage is increased to 10% in 2019 and years after.
6) State, local and real estate taxes – The deduction is limited to $10,000 in 2018. This change will most likely affect a significant number of taxpayers. We expect to see taxpayers who normally itemized their tax return to potentially take the standard deduction.
7) Home mortgage interest – deduction is reduced/limited to debt/mortgages of $750,000 or less. Prior to 2018, the amount was $1,000,000. The deduction for home equity interest has been repealed/is no longer available.
8) Miscellaneous itemized deductions subject to 2% AGI – has been repealed/is no longer available. This eliminates hobby expenses used by part-time DFS players.
9) 20% Qualified business deduction – this new deduction could prove to be extremely beneficial for DFS players who are considered professionals/business owner. The taxpayer is able to deduct 20% of the qualified business income, with certain limitations based on overall income
Whether you are a casual DFS player or a professional, keeping support for your expenses and amounts reported on your tax return is vital. In addition, the new tax legislation will affect all taxpayers and it is important to plan accordingly. The time is now to plan for the 2018 tax year.
Reach out to us today through our free consultation.