Everyone has at least one vice, whether we are willing to admit it or not. Looking at Dante’s list of seven deadly vices, I am certain that I have fallen prey to nearly all of them at one time or another—and enjoyed them heartily. Shhhh….

But those aren’t the vices we’ll focus on today. We’ll focus on things that our spouses, friends, community, or law enforcement consider vices and paying taxes for the vices:

Speculation, Sex, Sports, Spirits, and Smokes

  • Speculation (gambling or gaming)—state lotteries, religious bingo parlors, and casinos—provides substantial benefits to communities. At least half of the proceeds are designed to go back to the citizens or congregation. Winnings are taxed as ordinary income, while losses are deductible up to the amount of winnings if you are able to itemize. Online gambling winnings are also taxable—but are the expenses deductible? They are if online gambling is legal in your state, though admittedly sometimes it’s really hard to get a straight answer to that question.
  • Sex for pay (prostitution) is illegal in all states except Nevada. As a result, there are no deductions for expenses paid to prostitutes—not even if you are politician. Trying to deduct the costs by disguising the expenses as consulting fees or medical costs only generates hefty penalties—and ultimately public betrayal and humiliation. However, the prostitute’s income must be reported and taxed—as self-employment income. After all, even illegal income is taxable. The IRS doesn’t allow any deductions for expenses related to illegal income.
  • Sports involve many costs and benefits. Watching sports excessively can break up marriages, resulting in costly divorces. Promoters of new stadiums shoot for tax breaks, like Los Angeles’ offer of $275 million in tax-free bonds. Plus, new stadiums promise jobs—often minimum wage—and they serve beer—at highly inflated prices. It would be nice if those involved with sports were required to pay for all the damage from the riots resulting from drunken fans—taxpayers often pick up the tab for extra policing, while insurance companies or property owners pay for the damage. So what are the benefits of sports to the community? Some property owners near stadiums pick up money for overflow parking. Also, several states have instituted a “jock tax,” with players paying taxes for earnings from the games played in their states and related endorsement fees. That helps recoup some of the costs, at least on a state level.
  • Spirits include alcohol, cigarettes, marijuana, and so on. Each state has a variety of laws related to minimum age, legality of substances, and more. Federal law overrides local marijuana rules, even if the drug is being used for medicinal purposes. The benefits of these vices to both states and the IRS are tremendous. Each of these items has ever-increasing taxes on federal, state and local levels. Cigarette taxes average $1.46 per pack. Alcohol taxes generated nearly $6 billion as of 2008. And it’s unclear how much tax revenue marijuana generates—yet. As for the costs to the public related to these spirits, they include millions of dollars in medical costs, traffic accidents, public education, crime, imprisonment, and rehabilitation. Even more millions go toward tax deductions, as Americans make contributions to charities that help address these problems.

Overall, vices do generate some income to communities. Do the benefits outweigh the costs? That’s not entirely clear. But we can have a lot of fun exploring them!

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Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.