You don’t live there; you don’t work there so why do you owe Oklahoma state income tax? Did you PLAY there? Yes, several enjoyment type activities can be subject to both federal and state income taxes. Taxpayers are seeing that a trip to the Casino can come with an unexpected tax bill. Let’s break down reporting and see how it transfers to the Oklahoma state income tax return on the Federal side. Gambling winnings are reported on your federal income tax return as “Other Income” on page 1 of your 1040. Losses up to the amount of winnings are taken as part of your itemized deduction on Schedule A. If you do not have enough to itemize your deductions then the winnings are fully taxable. If you are able to itemize your deductions, losses offset winnings for the purpose to calculating taxable income. The winnings are included in your total gross income thus other items that have limitations tied to total income will be adjusted to the higher income effected.
Effective January 1, 2018 when we were all focusing on the major overhaul of the Federal Tax laws, Oklahoma quietly amended the Oklahoma Income Tax Act to change their state income tax calculations as well. They limited the standard deduction, with a couple of exceptions, to $17,000. In a nutshell, any losses over $17,000 are not allowed to offset your winnings thus making more of your gambling winnings subject to state income tax.
Under certain circumstances gambling can be considered a business, allowing for it to be reported entirely different. This avoids the limitation issue, however there is a large hurdle to overcome to qualify. One taxpayer decided to take their losses along side their winnings on the “Other Income” on page 1 section eliminating the entire issue with the itemized deductions on the Oklahoma state form both income and losses. They receive an “E” for effort alongside their tax bill. The IRS challenged their position and they lost their case in Tax Court. Another taxpayer reported their income and expenses on a business tax return which opened up a lot of opportunities, another “E” with a tax bill. This is specifically excluded approach to reporting gambling revenue. The IRS also challenged their position and this approach is excluded, they lost their case in Tax Court.
This change to Oklahoma tax law is having a negative impact on their revenue. By increasing the taxes, fewer Texas gamblers are driving north. Contrary to what the evening news may say, increasing taxes does not increase cash. Taxpayer adapt and Oklahoma is feeling this. Flights to Vegas and related travel costs are far less than the tax causal gamblers are feeling in their state income tax return.
OK SB626 is a bill that was introduced into the Oklahoma State Legislature in 2023 to respond to the negative impact of this limitation by making gambling losses one of the items not subject to the $17,000 limitation.
We had hoped it would pass earlier in the year but the wheels of government don’t roll, they inch along. As of this article, the bill is still in the legislative process.