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Tax Deductions for Professional Gamblers

Tax Deductions for Professional Gamblers

What could be better than winning $8.3 million at the World Series of Poker next week?

Not paying taxes on all $8.3 million.

Since a federal court ruling two years ago, there are tax deductions for professional gamblers similar to those for self-employed contractors and small businesses. Expenses like travel, meals, and lodging can be cut from their total income.

This means that if a professional player won $1 million and showed business expenses of $100,000 million during the year – he would only pay taxes on $900,000.

Are You a Professional Gambler?

So how do you prove to the IRS that you’re a professional gambler? Show that you treat the game like a business all year long; that you play to make a profit, not to have fun with your friends.

The federal tax code uses nine guidelines to determine what qualifies as professional gambling, and what doesn’t. Here are a few of those guidelines adapted from an article last year in the Journal of Accountancy.

Gambling Guidelines

  • Make a profit. Everyone loses money sometimes. But if you never win or profit, it’s hard to suggest that you make a living by gambling. This is the same way the IRS distinguishes between a small business and a hobby.

  • Keep records of the time you spend practicing and competing. Maintaining books and records show that you’re not just a casual gambler, you can prove that you’re a professional.

  • Study hard. Prepare for each tournament with a poker expert. This will show you consider gambling your job, and that improving your game is part of professional development.

  • Don’t have an entourage. Since gambling is usually for fun, you have to show that you are not playing for pleasure, but for a living. It is better to go by yourself. If you want family and friends to keep you company, don’t include them in your business expenses.

“Like most tax issues, accurate and proper tax planning is key. With a sensitive issue, such as professional gambling, having your tax strategy be IRS ready will be vital in keeping your winnings in your pocket.  Winning against the Internal Revenue Service is possible, as long as you hold the right cards in your hand.” –Andrew Park, Enrolled Agent at Optima Tax Relief.

How to Report Gambling Winnings?

Gambling winnings are reported through IRS Form W-2G. Depending on how much you win and the type of gambling you undertake, you may receive this form directly from the “payer” or organization from which you won the money. If the payer withholds federal income tax from your winnings, you will receive a Form W-2G. This form, according to Robert W. Wood of Forbes.com, works just like a 1099 Interest Form that you receive as part of tax time preparation forms. He reminds everyone the IRS also receives a copy of the Form W-2G and reminds winners to keep it handy for tax time to ensure full compliance!

If gambling winnings do not meet the following thresholds set by the IRS for the respective type of gambling, it must be reported as “Other income.”

Bingo or slot machines:  $1,200
Keno:  $1,500
Poker Tournament:  $5,000 (excluding wager or buy-in amounts)
“Other” gambling winnings:  $600

“Other” gambling winnings are those that do not include poker tournaments, slot machines, bingo, and keno – and the payout is at least 300 times the wager amount).

What if My Winnings don’t Meet the Above Thresholds?

No matter how much income is generated from gambling, it must be reported if you receive a Form W-2G or not. If your winnings do not meet the threshold, you must report your income under the “Other Income” line on the Form 1040 U.S. Individual Income Tax Return.

What do I Do if I Lose Money From Gambling?

Gambling losses may be deducted. Deductions are permitted up to the winning amount. Losses must be reported, as an Itemized Deduction, on Schedule A, separately from any winnings.

How are Winnings and Losses Substantiated?

The IRS requires proof of losses and winnings. In case of an audit and to maintain the integrity of your income tax return, the IRS recommends keeping all records related to winnings and losses. Items to substantiate gambling transactions include tickets, receipts, checks, and IRS Form W-2G (if given). Maintaining a notebook or other written documentation is highly suggested to keep winnings and losses separate and organized.

What Expenses Can Be Deducted?

Like most small businesses, professional gamblers can deduct expenses that the IRS considers “ordinary and necessary” to “carrying on any trade or business.” The website ProfessionalGamblerStatus.com provides a long list of tax deductions for professional gamblers you can deduct, ranging from internet connections (if you play online), to flights, car trips, and meals when you travel to tournaments.

List of Possible Deductions

  • Internet Costs, if you regularly play online
  • Home office expenses
  • Tax advice
  • Subscriptions to gambling magazines and newspapers
  • Gaming fees, chat room fees
  • Club membership fees and dues
  • Clerical and record-keeping expenses
  • Travel and meal costs during tournaments
  • Wages paid to relatives or employees for their assistance

You can also deduct money used to hire a poker coach or someone to keep track of your results. The payment just needs to be “a reasonable allowance for salaries or other compensation for personal services actually rendered,” according to the IRS.

To comply with the laws, make sure you don’t look like you’re trying to take advantage of the system. For instance, taking a taxi and flying coach would arouse less suspicion than renting a private jet and a stretched limo. That also applies for high rollers, who are often offered complimentary hotel rooms, buffets, and rides by casinos. Don’t try to pass those off freebies as expenses.

So what if you’re not a professional but you drive 60 miles, eat lunch, and have a great day at the track? Since you’re not a professional gambler, you can’t deduct any expenses. But you still have to pay taxes on your winnings.

Photo: Play Among Friends

IRS Form 1040-ES & Estimated Tax for Individuals

IRS Form 1040-ES & Estimated Tax for Individuals

You’re self-employed, which means that you no longer have to punch a clock or make that daily commute to spend the day in a cubicle. However, along with the freedom to set your own schedule comes the responsibility to make sure Uncle Sam gets his cut – and receives what you owe in a timely fashion.

That means either setting aside funds from your earnings to cover your tax obligation next April, or paying quarterly estimated taxes. Regardless of which strategy you take, the IRS has developed a worksheet to use to calculate how much you should set aside – IRS Form 1040-ES: Estimated Tax for Individuals.

Using IRS Form 1040-ES: Estimated Tax for Individuals

The IRS makes it easy (or at least as easy as paying taxes can be) to satisfy your federal income tax obligations by making quarterly estimated income tax payments. To begin making estimated payments, first download IRS Form 1040-ES, Estimated Tax for Individuals from the IRS website. For more details on how to complete the form, download Publication 505, Tax Withholding and Estimated Tax. The form is a PDF document that you can fill in and save with your information at any point.

Expected Wages

To calculate your expected wages for the coming year, obtain a copy of your prior year’s tax returns and locate the figure for your adjusted gross income to use as a starting point to estimate your income for the coming year. Subtract either your itemized deductions from your return or the standard deduction (whichever is larger) from your adjusted gross income. If the resulting amount is negative, adjust the total to zero. The result is an estimate of your wages for the coming year.

Calculate Estimated Tax

Once you’ve finished this calculation, use the included Tax Rate Schedule to calculate your estimated tax and enter the figure on the appropriate line of IRS Form 1040-ES. If you are subject to Alternative Minimum Tax (AMT), include the amount generated from IRS Form 6251 on IRS Form 1040-ES as additional tax. Subtract any credits you’re entitled to, such as the Earned Income Credit or deductions for use of your vehicle for business, medical or charitable purposes.  The result is your estimated tax.

Self-Employment Taxes

Use the resulting figure as the starting point to estimate your self-employment taxes. First, multiply your expected wages for the coming year by 92.35%, or .9235, and enter the result on line 3 of IRS Form 1040-ES. Multiply the figure on line 3 by 2.9% or .029 and enter the result on line 4 of IRS Form 1040-ES. Subtract your expected wages for the coming year from $113.700 (the maximum income subject to Social Security taxes).  If the result is zero or less, enter 0 on line 9 of IRS Form 1040-ES, and skip to line 10 on the form. If the result is zero or greater, compare this figure to the figure on line 3, and multiply the smaller result by 12.4% or .124 and enter the result on line 9 of Form 1040-ES. Add the figures from line 4 and line 9 together and enter the result on line 10. Multiply the figure on line 10 by 50% or .50 to obtain your estimated self-employment tax.

After you’ve completed all these calculations, add the estimated tax to the estimated self-employment tax. If the result is $1,000 or more, divide the total by four to determine your quarterly estimated payments. If the figure is less than $1,000, the IRS does not require you to make quarterly estimated payments. But before you throw your calculator across the room in frustration for having wasted so much time, consider this: you’ve generated a good estimate of how much you should set aside to cover your tax obligations.

Set Aside Funds

Whether or not you are obliged to make quarterly tax payments, you will still need to set aside funds to cover your income tax obligations. If you have a paid-wage job in addition to self-employment, you can ask your employer to deduct more from each paycheck to make the process automatic. If not, set up a “pay yourself first” account with your financial institutions, and commit to making regular deposits into the account until you collect the funds you need for each quarter.

By following this strategy, you’ll be far less stressed when you file next year’s federal income tax returns. If you still need assistance, feel free to give us a call.

Photo: Philip Taylor PT

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Not Food? Pumpkins Are Taxable

Not Food? Pumpkins Are Taxable

Every now and then you hear about state and local governments wanting to tax certain items which weren’t previously taxed, based on use. For example, some areas tax a five pound block of ice sold at a grocery store, but they don’t tax a five pound bag of ice cubes. The reasoning is, the block is refrigeration, but the cubes become part of a drink.

Other tax agencies see an individual snack (such as a cupcake) as taxable, the same item in a multi-pack is not. Sure, government at all levels seems to be cash-strapped. But sometimes these proposed rules make you wonder if government officials just have too much time on their hands. Take Iowa’s attempt to pass a pumpkin tax, a few years back.

A few years back, someone in the Iowa Department of Revenue (DOR) figured out that about 750 million pumpkins are carved into jack-o-lanterns each year for Halloween. Just like a jack-o-lantern lit from within by a candle, the eyes of Iowa taxing authorities lit up with possibilities. A new source of tax revenue!

That’s why someone at the DOR drew up a notice to send to retailers across the state, instructing them thusly: You cannot simply sell a pumpkin. You must first put on your Sherlock Holmes cap and dig till you find out the true intent of the purchaser. Will this pumpkin be food? If so, no problem. But if the orange ball with a green stem will become a decoration… cha-ching! Tax that bad boy!

According to the DOR notice, pumpkins are taxable if:

  • They are advertised as decorations or jack-o-lanterns.
  • If it is understood they will be used as decorations or jack- o-lanterns.

They are exempt if a buyer completes a sales tax exemption statement, claiming the pumpkin will be used as food. They will also be exempt if:

  • The pumpkin is a specific variety used to make pumpkin pies and is advertised for that purpose.
  • It is purchased with food stamps.

When one tax expert highlighted the silliness of tax based on intent, the blogosphere picked up on the idea, and soon the Iowa DOR dropped their efforts and rescinded the taxes, and maybe found better uses for their time.

Iowa is Not Alone

Iowa DOR may have needed a push from the blogosphere to come to common sense. But at least they did relent. Washington state, on the other hand, still taxes certain candy, while not taxing other very similar candy. The difference it seems boils down to whether or not the confection is made with flour “Candy does not include any preparation containing flour and does not require refrigeration.”

By this definition, Kit Kat, Twizzler Strawberry Twist, Milk Way Bars, and Hershey Powdered Cocoa for baking are all exempt from tax. But Brach’s Milk Chocolate Covered Raisins, Milky Way Midnight Bar, and Kraft Bakers Chocolate, unsweetened, all are taxable. Go figure!

Does it Matter?

Yes, most areas are cash strapped. But maybe they could save money by sending some tax authorities home, instead of having them waste time and taxpayer money working out the taxability of candy and pumpkins.

Photo: Wildcat Dunny

7 Most Outrageous Tax Deductions

7 Most Outrageous Tax Deductions

Think only celebrities and big corporations get away with outrageous tax deductions? We’ve put together a few reasonable ones you can take advantage of next year, and a few of the more outrageous tax deductions for fun.

1. Put your pup to work! Employing man’s best friend to protect your company grounds can offer some leeway with the IRS. Since the animal is considered part of the “protection” or security system for your place of business, some of your pooch’s care costs may be written off come tax time.

2. Enlarging your deduction — taken to the next level. In 1988 a stripper wrote off her breast enlargement surgery as a business expense. At first the tax courts denied her the deduction. Immediately she appealed the decision and sure enough, her implants were considered a business expense allowing her the tax deduction.

3. Getting a prescription for cash. Does your doctor feel you need to drastically improve your health in order to stay alive? Well the IRS wants you alive and kicking in order to keep up with your tax payments. If your doctor signs off on the purchase of remedies in order to drop some weight, you may be able to write the concoctions off as an expense on next year’s tax return.

4. Stick ’em up! No one escapes the IRS when there’s cash involved. Even criminals in the pen must pay tax on their bounty; ironically, they may be able to write off lawyer expenses as a tax deduction. Who are the real criminals here?

5. Smoke and mirrors. Lately, everyone seems to be trying to live a healthier lifestyle. Many smokers have decided to quit, if not for health reasons, then for the steep increase on cigarette taxes. Smoking cessation devices, patches, or other quit-smoking aids can indeed be written off at tax time. Take advantage of this and you may see some payback for cigarette taxes you paid last year.

6. Music to your ears. Signing junior up for clarinet lessons may not be such a bad idea after all. If your child has an over-bite it is scientifically proven that playing certain wind instruments can correct the problem. Junior practicing clarinet may keep you up at night, but writing off that lesson can help you sleep like a baby during tax time.

7. Moving on up. You made it. You finally got that big promotion and are moving to the city to rake in the dough and live the high life. As many people already know, you can write off your moving expenses when relocating for a job. If you have pets, moving can become a bit more costly especially if there is a plane ride in your pup’s future. Since this is considered a moving expense, you pet’s airfare is a write off as well.

At Optima Tax Relief we can help you take advantage of some of these legal, but outrageous tax deductions. Contact us for more information on how to keep more cash in your pocket and out of the IRS’s hands.

Photo: tolworthy