Be Prudent on Your Taxes: A Lesson from Ann-Margaret Johnston

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It’s tax season once again in the United States. Poker players from all over the country are either headed to their accountants or headed to their calculators to navigate the murky waters that make up U.S. tax law. With the recent legislative cloud that has hung over the industry, poker players across PocketFives.com have been wondering exactly what to do. We’ve got your answer! Ann-Margaret Johnston of PokerDeductions.com will appear on this week’s PocketFives.com Podcast to address issues weighing on the minds of PocketFivers. This is an episode you can’t afford to miss.

Poker has become an international sport. Each year, thousands of foreigners flock to Las Vegas for the World Series of Poker in pursuit of millions of dollars. The only problem is that many of them may be liable to pay taxes on their winnings and not even know it. Johnston explains: “It all depends on what country they’re coming from. If there’s a tax treaty between the U.S. and their country, then it’s not an issue. If there’s not, the casino is going to withhold 28% of their winnings. The tournament director will ask for their ID and automatically withhold 28%. The only way to get that money back is to get a temporary tax ID number and file a tax return. They’ll have to do everything a regular U.S. citizen would do. However, unless you have an accountant here in the U.S. that knows what they’re doing, it might be more of a hassle than it’s worth.”

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With many PocketFivers walking a thin line between playing poker as a hobby and playing poker as a living, it’s important to understand the differences between filing as someone who plays poker part-time and someone who plays the game as a professional: “I’ll run their returns as a professional and as a hobby. If you’re a hobby player, you don’t have the Social Security tax payment that professional players do. If you’re a professional player, you have the advantage of deducting airfare, lodging, and any travel expenses you have. One of the biggest things for most people is to run things both ways when they know their income and deductions.” What a concept: getting to fill out two sets of tax returns and then picking one to send to the IRS.

The conversation with host David Huber also turns toward record keeping. This is perhaps the most important part of a player’s duties during the course of the year, as proper record keeping will ensure you’re not in the IRS’ doghouse. Johnston offers several important tips: “If you make money gambling, claim it. On PokerDeductions.com, I have a sheet where you can keep up with your play. Always keep a log, especially if you go pro. I always recommend one credit card with all poker expenses on it. That way, at the end of the month, all of your expenses are there. Gambling income isn’t a big flag for auditing like it was years ago. If you file as a hobby or professional poker player, you don’t want to put “online poker” on your income tax return. Call it “gambling income.” It’s important that you put on there what you made.”

Remember, the U.S. Government brought down Al Capone for tax evasion, not any of the other crimes allegedly committed. If the feds can bring down Capone, they can surely see through any fudging you’re doing on your 2007 tax return. If you’re one of the many Americans who gets audited each year, here’s what you can expect: “One of the first things that happens is they’re going to ask to see your bank statements for the entire year. The best thing to do is to be up front. If you have money in a checking account, the IRS is going to look at 12 months’ worth of bank statements. They’re going to add up deposits and look and your tax returns. If there’s a discrepancy, they’re going to ask why.”

If you’re primarily a cash game player, it’s critically important to keep a proper log of your play. This is the only record you’ll have of wins and losses and, therefore, is the key to filing your return. Johnston explains, “Keep a log when you play cash games. It boils down to your word and your record keeping. It is pretty much an honor system. You should have some kind of log saying where you played, how long you played, and how much you made or lost. If you’re audited, the IRS will look at the log of what you did and it has to look believable.”

When you’re jet-setting around the country attending poker events, keep a notebook handy. It’ll make your life a lot easier. Plus, you’ll get to deduct expenses like cab rides, tips, and meals. Johnston notes how to deal with such items: “For cabs, keep a record of who you tipped and when you tipped then. You’ll also want to get receipts for your cab rides so you can deduct that too. Just keep a log and the IRS will have a tough time disputing it if your log looks legitimate.”

Johnston’s website is www.pokerdeductions.com. She’s the author of “How to Turn Your Poker Playing into a Business” and you can reach her at 877-PLAYBIZ. Thanks to Ann-Margaret Johnston, CPA, for joining the PocketFives.com Podcast. Check it out at www.pocketfives.com/podcast.