There are a few things you can reliably count on this time of year: The winds are a little less biting. The daffodils are finally making an appearance. Tax professionals have that “tell me it’s almost over” look as we enter the home stretch for individual returns. And in many parts of the country, just about everything stands still for March Madness.
This year, the madness known as the NCAA Men’s Basketball Tournament is going beyond bragging rights and classic rivalries. Billionaire Warren Buffett, together with his company, Berkshire Hathaway, has partnered with Quicken Loans, owned by fellow billionaire Cleveland Cavaliers owner Dan Gilbert to up the ante, offering $1 billion for a perfect NCAA tournament bracket. The contest, called the Quicken Loans Billion Dollar Bracket Challenge, made its debut earlier this month (you have until later tonight to finalize your picks).
Chances are that you and I won’t win the billion: the odds of winning are pretty slim (more on that later). It’s possible and indeed probable that no one will win at all. But that won’t stop millions of armchair basketball and billionaire wannabes from entering. Because let’s face it: who doesn’t want a billion dollars?
Whether you enter for the millions – or just play along with your friends – here are a few tips to keep in mind:
1. Enter the office pool. I’m not a betting girl. And I’m not telling you to bet. But if you’re going to bet on sports, your office pool may be the way to go. Why? Because the folks that tend to enter are generally those that play the odds occasionally – as opposed to your hardcore bettors. And they tend to be folks that will bet on their sentimental favorites or their gut as opposed to a well thought out analysis. Yes, Nate Silver or Stephen Smith could be your office mates but chances are they’re not. That makes your odds of winning – even if you’re not a rabid basketball fan – not so very far from everyone else’s.
2. Keep good records. It doesn’t always cost money to enter your office pool since sometimes you’re just playing for fun – and possibly lots of bragging. But sometimes you do play for money. And if you play and you win, chances are that your officemates will pony up their cash but they won’t be scrambling to provide you with a federal form W-2G, Certain Gambling Winnings (downloads as a pdf).
A form W-2G is used for tournaments and wagers when the winnings, after the cost of playing, are $600 or more and at least 300 times the amount of the wager. A form W-2G will also be issued if winnings are subject to federal income tax withholding: this includes backup withholding and well as regular gambling withholding. “Regular” gambling withholding is a flat 25% rate if your winnings from a gambling pool minus the cost of your wager are more than $5,000. Remember that gambling winnings don’t just include cash – it also includes noncash payments like watches, electronics, vouchers, and whatever else your fellow gamblers offer up.
Even if you don’t receive a form W-2G, your gambling winnings are reportable as income. For casual gamblers, you would include that income on line 21 of your 1040. You’ll want to be sure and document the exact amount of your winnings for tax purposes – especially after you’ve bragged all over Facebook and Instagram.
3. Not all statistics are created equal. Depending on who you believe, your chances of winning the Quicken Loans Billion Dollar Bracket Challenge are either 1 in 9,223,372,036,854,780,000 or 1 in 7,419,071,319. That’s because the contest requires you to pick a perfect bracket: that’s a pretty tall order.
Most office pools, however, don’t require you to be perfect. Most don’t even require you to pick the winner. Most simply require you to have the most points. With some contests, you can win by choosing the most winners and not necessarily the best winners. There is a distinction. That just means you have to pick better overall than everyone else in the room: that’s a lot more doable than besting millions of other hopefuls.
When you’re choosing your brackets, be most thoughtful in the first round. Those are – Cinderella teams excepted – the easiest to nail down. According to Silver, on average, favorites in the first round have a 78% chance of winning. It goes down from there: by the team you reach the Sweet Sixteen, the favorites only win 61% of the time.
4. Do your homework – but it only helps if you win. I’ve already stressed that your gambling winnings are taxable. But what about offsets? Can you deduct the cost of becoming a winner? What about premium channels, data, websites, and related costs to pick the right teams?
If you enter office pools and similar contests as a hobby, the IRS has consistently ruled that related expenses – no matter how integral – are personal in nature and not deductible. In that regard, gambling for sport is treated differently from all other hobbies. The only offset you can take – after deducting the cost of your winning wager – is the total of your gambling losses for the year. Those losses are claimed as miscellaneous itemized deductions reportable on a Schedule A. Excess gambling losses are lost forever: not only can you not deduct more losses than winnings in any tax year, you can’t carry excess deductions forward or backward.
If, however, gambling is your business, you would report your winnings and your related expenses on a Schedule C. If that’s the case, your expenses aren’t limited by your income and are fully deductible. This hasn’t always been the case: the IRS has traditionally taken the position that section §165(d) of the Tax Code which allows gambling losses “only to the extent of the gains from such transactions” is the only deduction allowable to gamblers. Many professional gamblers disagreed, taking the position instead that §162(a) of the Tax Code which allows for business expenses should apply.
In 2008, the Office of Chief Counsel at the IRS released a memorandum (downloads as a pdf). It’s important to note that a memorandum isn’t supposed to be relied on as the gospel. It even says so right on the page: “This advice may not be used or cited as precedent.” But it does give you an idea of how the IRS might address some of the underlying issues. The conclusion the IRS reached when asked about this matter was:
The limitation in § 165(d) applies only to wagering losses, not to expenses incurred to engage in the business of gambling. Those business expenses are subject to the ordinary rules governing deductibility under § 162(a).
That means that, assuming the IRS stands by its own (though admittedly covered-with-disclaimers) position, business expenses for professional gamblers are deductible so long as they meet the “ordinary and necessary” tests. Beer and Cheetos while watching the game aren’t deductible. But premium content and insider tools might be. I said might. It’s all facts and circumstances dependent – consult with your tax professional for the specifics.
5. It’s really anybody’s game. I know. I just wrote that statistically, the favorites tend to win. But that’s not always the case. Remember in 2005 when Bucknell shocked Kansas? Or in 1991 when Duke avenged a 30 point loss in the prior tourney to beat UNLV in the Final Four – and eventually take the whole thing? Or my all-time favorite upset: when Jimmy V’s NCSU team made an amazing dunk at the buzzer to edge out Houston (yes, with Hakeem Olajuwon and Clyde Drexler) in the 1983 finals?
It was a fitting win for the man who would be famous for saying, “Don’t Give Up…Don’t Ever Give Up.”
In the end, the winner isn’t who wins the most during the season. It’s who wins the most when it matters.
6. It’s not about winning or losing but how you watch the game. A lot of what happens in the tournament doesn’t have to do with winning or losing. Remember that statistically, most of us don’t stand a chance at Buffett’s billion. And of the 68 teams who made it into the tournament, only one of them is going to take home the trophy. But that isn’t what the madness is about, is it? It’s about how it makes us feel.
Mark Cuban knows a little something about how sports make us feel. The owner of the Dallas Mavericks explained on his blog what he hoped fans took away from attendance at Mavs’ games – and it wasn’t about ticks in the win column:
Think back to the first professional sporting event you ever went to. It was probably a parent taking you to the game. What do you remember? Do you remember the score? A home run? A jump shot? A pass play? Or do you remember who you were with? I remember being with my dad at a Pirates game. My dad and my uncle at a Steelers game. Think about your fondest memories at a sporting event. Again, what do you remember? Hanging with your buddies? A first date? A last date ? How you felt after the team won or loss? A business partner or customer? Or the score? I’m guessing its not the score.
Cuban went on to say that sports are about the experience. At the Mavericks, he explained, “we are in the business of selling fun.” And that’s what the tournament – and the madness – is about.
According to RetailMeNot, almost 3 in 10 (27%) respondents in a recent survey plan to watch the NCAA tournament games at work: nearly 4 in 10 (39%) of those plan to stream right from their computers. Everyone else, it seems, will be checking scores or chatting about the tournament with co-workers: an MSN survey found that only 14% of workers will ignore the tournament altogether during work hours.
Since most employees plan to engage in a little tournament banter, why not engage the whole office – and make it fun? It’s relatively cheap and easy to put a television in the break room and provide some game time snacks for employees. So long as those snacks aren’t extravagant, that entertainment is free for the employer and tax-free to the employees. It’s considered de minimis, which is a fancy way of saying “of little consequence.” Under the Tax Code, de minimis fringe benefits are among those that are excluded from federal income tax withholding, Social Security tax, Medicare tax, or federal unemployment (FUTA) tax. They’re not even reported on a form W-2.
Also excluded? Meals on the premises. Since 20% of men surveyed said they would go to a bar at lunch during the workday to watch the games, why not provide an incentive to keep them at the office – and sober? So long as meals are for the convenience of the employer, they, too, qualify as an excluded benefit. A game day spread is a great office perk – complete with tax benefits.
7. It’s okay to be trendy. I know we all want to be the one to make that pick, that surprise pick that nobody saw coming. It’s fun, isn’t it? When a Cinderella team wins? But while Cinderella may make it to the dance, she rarely dances into the Final Four. Sometimes favorites are favorites because it makes sense. This year, based on a number of predictions from various sports sites including ESPN, it looks like Florida is the clear favorite to win it all, followed by Michigan State and Louisville. Also near the top? Perennial favorites Duke, Kansas, and Syracuse. Those are the safe picks – and for good reason.
8. Have a back-up plan. Playing the odds is fun. But unless you’re Silver, it’s not your best long-term investment strategy. In a recent survey, a third of people indicated that they believed their March Madness bet would offer a better return than their 401(k) plan. That math, as you can imagine, is a little bit skewed… During your lifetime, investing just $10 per year, the same as the average March Madness bet, with a 50% employee match (and assuming a 7% return) would yield $3,107 at retirement. That’s about $3,107 more than most taxpayers will actually make playing the odds and it’s tax-deferred. As opposed to gambling winnings, which are immediately taxable, with a 401(k), you pay federal income tax on the money at the time of your withdrawal – which could be decades later.
9. This might be one time that you don’t want to follow your heart. I always vote for my favorites. That’s also why I never win. The French and German interns in my office consistently have a higher winning percentage. I’m convinced it’s because they vote on statistics and not sentiment. No matter how much I want NC Central – just down the street from my old high school – to make it to the finals, statistically, that’s not very likely. Despite those adorable pictures of Phil Martelli’s mini-me in a suit courtside, Saint Joseph’s won’t end up on top. And who wouldn’t want Wofford to bring the trophy home for Aerris Smith who played his heart out to send his team to the tournament while getting injured in the process? He said, about his win, “I made a decision: I was going to give my all in this tournament, and they were going to dance without me. But that’s OK. Because we came out on top.” C’mon, who could vote against that guy? Statisticians. And the guys who will ultimately win their brackets. Not those of us sniffling into our sleeves. Even if it does make a great story.
And one more because it’s important:
10. Understand that it’s just a game. Unless it’s not. Picking brackets is fun for me. Because it’s a game, nothing more. I don’t have a compulsion to gamble. If you feel that you have a problem with pathological gambling, you should seek help. Many support groups are free but if you do have to pay up, you might be able to deduct the expense on your federal income tax return as a medical expense itemized on a Schedule A. Not all programs will qualify but generally, inpatient treatment at a therapeutic center for gambling addiction should meet the definition of a qualified medical expense. If you’re not sure if your program qualifies, ask your tax professional for more information.
With just a few more hours to go, it’s time to let the games begin. As a sports fan, I love this time of year. And yes, it’s fun to speculate about the possibilities. But don’t get too wrapped up in the idea of winning – especially when it comes to Buffett’s money. According to Silver, it’s not worth it: having a 1-in-7.4 billion chance of winning a billion dollars is worth the equivalent of 14 cents… and that’s before taxes.