Strike It Rich!

[Snaggletooth]

Paula, Texas resident (no state income tax) frequently visits casinos in Mississippi. One night she won $100,000 in progressive slots, and for purposes of discussion assume this happened in 2011 so as not to complicate the possibilities.

The casino in Biloxi withheld $15,000 in Federal tax and $3,000 in Mississippi tax. The Federal tax is not relevant to the question.

Question: Can Paula deduct the $3000 Mississippi tax as an itemized deduction?

Before you answer, first consider that the $3000 is defined by Mississippi as an Excise tax and not an Income tax.

At one time, casino withholding was 5%. But non-residents would file Mississippi tax returns and get half of this money back. The result was MS was processing 3X as many NONresident returns as resident returns! And for very small amounts of money plus they were having to issue refunds on these returns.

Not a good thing for the Dept of Revenue in Jackson. So they reduced the casino withholding to 3%, to discourage nonresidents from going to the trouble to file the return. That didn't work either, as the calculations were so simple that Turbotax filers could do the nonresident return just by pressing a few buttons.

So the final solution came when Mississippi changed the tax from an INCOME tax to a EXCISE tax. This is no longer refundable or even reportable on a non-resident return and their problem is now solved.

But what about Paula? When this was an income tax, it would clearly be deductible on Schedule A. But things have changed.

What say ye??

[Jiggers]

Interesting and pretty smart legislators in Mississippi.

I would say that the excise tax is not deductible as an itemized deduction.

However, "Mandatory contributions made to ....." certain taxes by employees through payroll deductions are deductible. See the TheTaxBook page 4-8. When I worked in California, there was a courtcase about the deduction and it was declared to be deductible.

What does the W-2G show for state withholding?

[FEDUKE404]

Interesting approach

I never heard of such....very creative folks in MS!

It sounds like the lucky winner has to pay federal income tax on her (entire) earnings, and MS just gets its 3% cut off the top without further discussion. And nothing to Schedule A either.

One would think the lawyers might have gotten involved in this fiasco??

As Jiggers stated, is there ANY entry for MS "payment" on the Form W-2G ?

But on the bright side, the TX resident still does not have to file a state income tax return.

FE

[Jiggers]

I never heard of such....very creative folks in MS!


But on the bright side, the TX resident still does not have to file a state income tax return.

FE

Just wish the state of Texas would consider the same thing. Especially for those many out-of-state winners. They take their money and go home.

Actually, I wish Texas would have an excise tax on lottery winnings over $1,000. Withheld before payment.

But the Texas Legislature isn't that smart. They have totally screwed the the corporate franchise tax over the years and still can't get it right.

[ChEAr$]

casino winnings

I've clients from time to time head down to Biloxi, etc for an exciting time and find it an "excising" time, having MS tax withheld.

Naturally the winnings are taxable to state of Alabama, which allows a credit for the MS tax on it's schedule cr against state income tax, just as if it were still income tax paid to MS.

Now then, what prevents a federal schedule a deduction? I dont' see excise taxes proscribed in publication 17, page 154. And good old Drake software picks up the excise tax from the W2G form for schedule a. I hope they're right about that.

[FEDUKE404]

From MS Dept of Revenue

I've clients from time to time head down to Biloxi, etc for an exciting time and find it an "excising" time, having MS tax withheld.

Naturally the winnings are taxable to state of Alabama, which allows a credit for the MS tax on it's schedule cr against state income tax, just as if it were still income tax paid to MS.

Now then, what prevents a federal schedule a deduction? I dont' see excise taxes proscribed in publication 17, page 154. And good old Drake software picks up the excise tax from the W2G form for schedule a. I hope they're right about that.

The State of Mississippi appears to disagree with you..........

Gambling Winnings

Gambling winnings reported on a W2G, 1099, or other informational return from Mississippi casinos are subject to a three percent (3%) non-refundable income tax. The casinos withhold the tax at the time of payout.

The amount withheld is non-refundable to the taxpayer. Section 27-7-901 of the Mississippi Code provides that the amount of winnings reported on W2G, 1099 or other informational return from Mississippi casinos are not included in Mississippi income and no income tax credit is allowed for the amount of withholding.

A non-resident taxpayer with only Mississippi gambling winnings and/or losses should not file a Mississippi tax return. The document provided by the casino is considered the income tax return for this type of Mississippi income and therefore is proof that the tax was paid to Mississippi.

I would assume that AL credit for taxes paid to "foreign" states also uses the customary lesser of calculated tax versus actual tax paid to other state limitation (see lines 3 & 4 of AL Sch CR) which would reduce the potential AL credit to zero as there would be no MS income tax liability.

Caveat: I just pulled this stuff up on the internet, so will certainly defer to someone with more actual involvement with MS gambling winnings. It all seems to boil down to whether a person did/did not pay "income tax" on the MS gambling winnings. "Yes" can yield a potential tax credit to the home state (and also a federal Sch A deduction?) and "no" means.....MS took its cut and have a very nice day.

Related question: Are these MS gambling activities on state property, or on "foreign" ( = Native American ) land????

FE

[Redneck]

Louisiana resident

Here in Louisiana as a resident if I have gambling winnings in the state of MS the 3% deducted from the winnings is a deduction form the state of LA taxes just like any other state taxes paid to other states because the winnings are taxable to LA.

[FEDUKE404]

Clarification

Here in Louisiana as a resident if I have gambling winnings in the state of MS the 3% deducted from the winnings is a deduction form the state of LA taxes just like any other state taxes paid to other states because the winnings are taxable to LA.

So you are saying that, for purposes of an out-of-state tax credit for LA residents, that there IS an income tax liability to the State of MS than can be used??

Or stated differently, the MS income tax return would (out of necessity) show a tax liability?? That does not flow with the verbiage presented by the MS tax folks...

And then, what do you do with the "maybe it is/maybe it is not" MS excise/withholding item on your federal Schedule A ??

FE

[ChEAr$]

What I said above re AL accepting the 3% paid to MS via withholding comes straight from the horses' mouth in Montgomery, i.e. state Dept of revenue. The credit on the AL form 40 , schedule cr, has nothing to do with how MS views the character of the income.

So, both in Loosana, and Alabama, (which includes both UA and LA; upper Alabama and Lower Alabama) treatment is the same.

[Redneck]

So you are saying that, for purposes of an out-of-state tax credit for LA residents, that there IS an income tax liability to the State of MS than can be used??

Or stated differently, the MS income tax return would (out of necessity) show a tax liability?? That does not flow with the verbiage presented by the MS tax folks...

And then, what do you do with the "maybe it is/maybe it is not" MS excise/withholding item on your federal Schedule A ??

FE

The W2-G list state taxes withheld. The W2-G does not list an excise tax anywhere.
Therefore my software puts it on schedule A for a possible deduction.
No MS tax return needs to be filed. The taxes withheld for MS is a credit against the taxes owed to LA because the income(winnings) are taxable to LA because of being a resident of LA.

[Kram BergGold]

It is an income tax not an excise tax

FEDUKE quoted a source which says,
"Gambling winnings reported on a W2G, 1099, or other informational return from Mississippi casinos are subject to a three percent (3%) non-refundable income tax. The casinos withhold the tax at the time of payout."

This says it is a non refundable INCOME tax. That is why Alabama and Louisianna give a credit for it and I would take it on Schedule A.

[Corduroy Frog]

Software Deducts It

ChEAr$, myself and other states who neighbor Mississippi get several W-2G forms every year - I probably get maybe 10 or so. Lotsa people in TN go to Tunica. The amount taken by MS shows up on all these W-2Gs, and Drake allows the deduction on Sch A.

Thanks to those who have quoted Mississippi in their definition of the tax. However, calling it an "income" tax doesn't necessarily mean so. A bunch of people will call a hog a cow. Politicians call horrible legislation as "for the children" to make it sound wonderful. However, I think the casino tax really is an income tax because it's assessed as a percentage of income.

As a sideline note, I have had on occasion a client with several W-2Gs totalling around $40-$50,000. And they don't use their tracking card in the casino, so they cannot validate their losses. Some people actually lose more money than what is shown on the W-2G, and can't deduct it. Not only that, but it doesn't even get hit with the 2%.

[JohnH]

For what it's worth, I've been taking the deduction on Schedule A for the MS tax withheld for years, and also claiming the credit on the NC return for tax paid to another state on dual-taxed income. NC requires a copy of the return filed in the other state, so when MS switched to this flat 3% several years ago, I just began attaching a copy of the W2G to support the credit on the NC return. I photocopy the W2G on a sheet which also contains the convoluted MS explanation of why their tax is something else. An examiner for the state of NC told me this was the proper way to handle it when I called to inquire about it. It hasn't actually been tested in an audit (IRS or NC) so I can't say it's proven, but it seems logical to me.

[Gary2]

I didn't see any definition of "income tax"in section 164 (which deals with deducting state taxes), nor in the associated regs. The term "excise tax" is so general that I don't think it would exclude the MS gaming tax, even if that's what they call it in their statutes. And there's surely nothing that says deductible state income taxes must all be of the same flavor or reported to the individual state in the same way. So, although my knee-jerk reaction was to think it's not deductible, I no longer think so because I don't see how it could be excluded.

For what it's worth, NH had a tax on gambling winnings that lasted about a year before repeal. While in effect, it had a totally separate tax return from the NH interest and dividends tax.

[taxxcpa]

Excise tax or income tax

As I see it a tax based on income is an income tax whether you call it an excise tax or a gambling tax or a thumb tax.

Whether or not it is deductible under the state income tax law or not is up to the state, but calling an income tax by any other name should not affect the federal tax or override federal laws.