The Jock Tax

A typical scenario:  You live in an apartment in New York City.  You play a majority of your online poker in the NYC apartment.  You travel occasionally, sometimes to play in live games in Nevada and New Jersey, sometimes just for pleasure.  You finish the 2010 year with positive net gambling winnings from your live play in Nevada and New Jersey, and from online play.

The question:  What is the “Jock Tax,” and how is it relevant in this scenario?

The Jock Tax is imposed by certain states in order to obtain tax revenue from non-residents who come into their state and earn income.  The name predictably originates from states taxing the income of professional athletes who travel into their state to compete.  The tax bites (i.e. generates additional revenue) on non-residents because a state imposing income tax typically taxes its residents on all income, regardless of where it is earned.

Take the scenario above.  New Jersey is imposing the Jock Tax on you, the New York resident.  The impact?  A rather large tax burden.  Your net gambling winnings from playing poker at a casino in Atlantic City are taxed by not one, not two, but three government agencies:  the IRS; New York State Dep’t of Taxation and Finance; and NJ Division of Taxation.  (Note: New York City imposes an additional tax on personal income of City residents).  If you received a Form W-2G from the casino because you won $5,000 or more in a live poker tournament in 2010, for example, all three agencies have notice of your income.

That sounds like a lot of tax.  In the highest tax bracket?  For 2010 income:  35% federal tax rate + 7.85% NYS rate + 3.64% NYC rate + 8.97% NJ tax rate = 55.46% overall tax burden.

“This is ridiculous!  More than half of my winnings go to taxes???”  Well, not really.  Income tax credits are available to reduce tax burdens.  Be familiar with them.  In this case, the NYS resident paying income tax to NYS on its gambling winnings earned in New Jersey can take a tax credit for the corresponding income tax paid to New Jersey.  Ultimately, you pay only the higher of the two state’s tax rates (in addition to the federal rate, of course).

Change the scenario slightly.  You live in Nevada, and have gambling winnings in both Nevada and New Jersey.  You can’t take an income tax credit for the income tax paid to New Jersey.  Why not?  Remember from last time?  Nevada doesn’t have an income tax, so there’s no double tax burden.

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