Nonresident Benefits of Legalized Online Gambling in Connecticut
November 23, 2021
By Andrew Cohen
If you listen to the radio or watch television, you’ve probably heard advertisements promoting DraftKings and FanDuel fantasy sports contests. In May of 2021, Connecticut Governor Ned Lamont signed into law Public Act No. 21-23, which allows for sports betting and online gambling in Connecticut. The sports betting and online gambling officially began at 6:00 a.m. on October 19, 2021 (after a soft launch the two weeks prior), making Connecticut the 20th state to allow online gambling. The governor made the first legal in-person sports wager in Connecticut at the start of the soft launch. Connecticut is positioned to generate significant revenue from allowing sports betting and online gambling in the state. For example, New Jersey earned $1 billion in sports betting in September of 2021. Connecticut’s tax laws on gambling are favorable to nonresidents, making it more attractive for out-of-state gamblers to participate in sports wagering online in Connecticut.
Connecticut also established safeguards for those who want to voluntarily curb their gambling. They created a voluntary self-exclusion list, for both online and in-person gambling, which can exist for a period or for a lifetime. By voluntarily placing your name on the list, an individual can set limits on the extent of his/her online or in-person gambling.
Sports wagering occurs at a sportsbook where a gambler can wager on various sports competitions. With online consumer gaming, bettors can place wagers on casino games, teams, or individual statistics like rebounds or steals in a basketball game. Additionally, there are more than 130 casino games that are approved by the Connecticut Department of Consumer Protection, including slot games, blackjack, roulette and baccarat. You must be 21 years or older and either living or visiting the state of Connecticut to place a bet at either the Mohegan Sun or Foxwoods Resort Casino. Connecticut is currently authorizing only two sportsbooks, Mohegan Sun and Foxwoods. The bettors can gamble in Connecticut on their phones, tablets or other online devices. The bettors can choose between two online casino apps, FanDuel at Mohegan Sun and DraftKings at Foxwoods. Just how will Connecticut tax the gambling winnings?
Guidance on Connecticut income tax treatment of gambling winnings, other than state lottery winnings, can be found at the Connecticut Department of Revenue Service’s Information Publication 2011(27). In accordance with the publication, gambling winnings include proceeds from a wager placed in sweepstakes; wagering pool or lottery (other than state-conducted lottery); payment made to winners of poker tournaments; and proceeds from wagering transactions, which include a wagering transaction in a casino. Whether gambling winnings are subject to Connecticut income tax depends on whether or not the winner is a Connecticut resident.
According to the guidance, if the winner is a Connecticut resident and meets the gross income test, all gambling winnings are subject to Connecticut income tax to the extent includable in the winner’s federal adjusted gross income. If the winner is a part-year resident and meets the gross income test, gambling winnings are subject to Connecticut income tax to the extent includable in the winner’s federal adjusted gross income and to the extent the winnings were received during the Connecticut residency portion of the winner’s taxable year. If the winner is a nonresident of Connecticut, gambling winnings, whether from gambling in Connecticut or from gambling outside Connecticut, are not subject to Connecticut income tax. In 2021, for purposes of the gross income test, an individual taxpayer is required to file a Connecticut income tax return if his/her gross income for the taxable year exceeds $12,000 for married filing separately, $15,000 for single taxpayers, $19,000 for head or household, or $24,000 for married filing jointly taxpayers.
Gambling losses are not deductible for Connecticut income tax purposes even though, in certain circumstances, they are deductible for federal income tax purposes. Additionally, neither a resident nor part-year resident is eligible to claim a credit against his/her Connecticut income tax for income tax paid to another state on gambling winnings. Finally, some sportsbooks or casinos may be required to withholding Connecticut income tax on the gambling winnings.
Withholding of Connecticut income tax in the amount of 6.99%, the highest individual tax rate, on the gambling winnings is required if all of the following conditions are met: (1) the person paying the gambling winnings maintains an office or transacts business in Connecticut; (2) the payment is subject to federal income tax withholding; and (3) the payment is made to a resident or to someone receiving the payment on behalf of a resident. Gambling winnings and withholdings are reported on the Form W2-G. If the taxpayer receives a W2-G, it must be attached to Connecticut Form 1040 if Connecticut tax is withheld. Gambling companies generally have a standard practice of automatically withholding a quarter of gambling winnings for tax purposes. Federal income tax withholding is required on regular gambling winnings when the winnings minus the wager are more than $5,000 and are from sweepstakes, wagering pools, lotteries and other wagering transactions if the winnings are at least 300 times the amount wagered. Regular gambling withholding does not apply to winnings from Bingo, Keno, slot machines or other wagering transactions if the winnings are $5,000 or less. Federal backup withholding is required when the winner doesn’t furnish a correct taxpayer identification number, regular gambling withholding hasn’t been withheld, and the winnings are at least $600 and at least 300 times the wager—or at least $1,200 from Bingo or slot machines or $1,500 from Keno of more than $5,000 from a poker tournament.
Connecticut currently does not have legislation to amend its tax treatment on gambling income to include nonresidents. This creates an opportunity for nonresident gamblers to place wagers in Connecticut without any risk of state taxes being imposed in Connecticut on the winnings. A resident of Connecticut is any individual domiciled in the state of Connecticut or any person who is not domiciled in Connecticut but maintains a permanent place of abode in the state and is in the state for more than 183 days during the tax year (Conn. Gen Stat. 12-701(a)(1)). Domicile is defined in the Connecticut Agencies Regulations 12-701(a)(1)-1(d) as a place that is intended to be an individual’s permanent home to which the individual intends to return to when absent. A person can only have one domicile and, once established, continues until the individual moves to a new location with a bona fide intention of making his/her fixed and permanent home there (CT. Conn. Agencies Regs. 12-701(a)(1)-1(d)(6)). If there is a question as to whether a person is domiciled in Connecticut, CT. Conn. Agencies Reg. 12-701(a)(1)-1(d)(8) lists a series of factors that are considered by the state in making this determination. The Connecticut domicile and statutory residency rules can be complex, so please consult your tax professional for more information regarding these rules.
With the National Football League, college football, National Basketball Association and National Hockey League in full swing, there are plenty of games on which to bet. If you are in Connecticut and want to gamble on these games or participate in a game of blackjack, you can place a bet online or in person, either at the Mohegan Sun or Foxwood Casinos and Resorts. Only residents of Connecticut will pay tax on any gambling winnings providing more incentive for out-of-state gamblers to visit the state and participate in the entertainment.