Poker Tax Q&A
Updated: September 2009
Ann-Margaret is the author of “How to Turn Your Poker Playing Into a Business.” She is an accomplished accountant who is also becoming an accomplished writer as more of her work is published in leading poker publications. You can learn more about Ann-Margaret and buy her book at http://www.pokerdeductions.com/.
This is U.S. tax law.
THE BASICS
-Please explain the tax basics for poker winnings and losses.
The basic rule is this. If you earn money doing something, be it poker or any other form of income, you are supposed to claim this on your tax return. That is the tax law – they make it pretty cut and dry.
Now, if you have poker winnings and losses, the next question is how to report it on your tax return. This is where you have to figure out if you are treating your poker playing as a business or not. If it is your business, you are able to claim all expenses that you incur related to poker, not just the amount you spend to play (losses). Some examples of this include your meals and entertainment, travel, auto expenses, etc. If your poker is a hobby, you can only claim the losses you have – not any other expenses.
PRO OR HOBBY?
-What are the differences between filing as a professional and filing as a hobby player?
A hobby is an activity for which you do not expect to make a profit. If you are thinking of starting a business but it does not provide you with the ability to earn a living, or to make a profit, it very well may be a hobby.
It is important to first distinguish as to what your intentions are with your poker playing. Ask yourself these questions:
– How often do you play?
– Do you depend on these winnings to pay bills?
– Do you have another job and if so, how many hours per week do you work?
– How much time do your dedicate to playing poker?
The answers to these questions are important. A hobby is something you usually do in your spare time and is not relied upon to pay the bills. It is normally for fun or entertainment in addition to your other main income source. Profit is not typically the main goal when you have a hobby.
It is important to know the difference between something that is a hobby and something that is for profit. Hobby expenses are deductible only to the extent of hobby income.
NOTE: Gambling expenses, if you are a hobby, are treated different from any other hobby. Non-professional gamblers are not allowed to deduct expenses for transportation, meals, lodging, etc. You can only offset your income with the money you lose.
As a professional gambler, you report your gambling activity on a Schedule C, Profit and Loss from Business. This form goes along with your personal tax return (Form 1040) and submitted to the government. This is the form where you summarize what you made from gambling, what money you lost and the gambling-related expenses that you had.
At this time, the IRS will not allow you to deduct more expenses than income – even if you are considered a business. Of course this is not true for other types of businesses. “Regular” businesses can take more expenses than income and have losses on their tax return.
Gambling is a totally different from other businesses. It has always been the rule that if you have gambling income you can offset it with gambling losses. This rule applies to the “hobby” gambler that can only offset these winnings if they can itemize. By taking it a step further and becoming a business, the IRS still applies the gambling rules. Basically, you cannot exceed gambling winnings and you have to show a net profit of zero if your expenses are more than your income.
So what are the tax benefits of treating your gambling as a business? Well, it’s the only way to take your gambling-related expenses even if you can only net them to zero. If you had income and were a hobby, you would still have to claim the income on the front page of your tax return. Remember the expenses are not deductible if you are a hobby, only the losses up to the income amount and only if you can itemize. Therefore, the adjusted gross income (AGI) for a professional gambler would be lower than the hobby gambler.
There are credits that you may be able to take that are based on the amount of your adjusted gross income (AGI). The lower your AGI is, the more likely you are to be able to take other credits or deductions. Some of these credits include Earned Income Credits, Child Tax Credits, Education Credits, deductibility amount of IRA contributions, phase-outs of personal exemptions, itemized deductions, etc.
-How does one file as a hobby player?
If you are not a professional gambler, your wins must be reported on the front page of your 1040, on the line that says “Other income. List type and amount.” This is called hobby income, specifically from gambling, and yes, you are required to report it.
Hobby income is not subject to Self-employment tax. Self-employment tax is Social Security (6.2%) and Medicare (1.45%) and then you have to match it. Therefore, Self-employment tax is 15.3% of your net income. A person that has their own business has to pay this tax in addition to Federal income tax on their net income (and any state tax, if applicable). But, if you are a hobby, this is not the case.
Although income from a hobby is not subject to Self-employment tax, it is taxed for Federal income tax, depending on your tax bracket. That is the good news. The bad news (possibly) is that the losses that can offset hobby income cannot be netted on the front page of your 1040 on the line that says “Other income. List type and amount.” The losses to offset that income can only be deducted on a Form called a Schedule A. This form is for itemized deductions.
Here is the bad part of all this. If you cannot itemize, you technically cannot offset those gambling winnings. It’s unfair but it’s the rule. If you have a substantial amount of losses, i.e. over about $10,000, then you may be able to itemize with just your gambling losses.
–What must you do to be considered a pro?
The IRS has several “facts and circumstances” tests in making the distinction between whether you are a hobby and a business. Unfortunately no one factor necessarily helps to determine this.
The following are factors that should normally be taken into account:
– Whether you carry on the activity in a businesslike manner
– Whether the time and effort you put into the activity indicate you intend to make it profitable
– Whether you depend on income from the activity for your livelihood
– Whether your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business)
– Whether you change your methods of operation in an attempt to improve profitability
– Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business
– Whether you were successful in making a profit in similar activities in the past
– Whether the activity makes a profit in some years, and how much profit it makes
– Elements of personal pleasure or recreation
The IRS guidelines on this topic are available in Section 1.183-2 (a) and (b) of the Federal tax regulations which is a great topic to read if you are an insomniac! The above bullets summarize what they are looking for.
-I made a modest amount playing poker in 2009, and now I’m conflicted as to whether or not I need to file a Schedule C form. I have no job. Poker is my only source of income, though it is far from a lucrative source, just enough to support myself. Do I need to file as a professional gambler if it’s what I do full time? Or can I declare myself “unemployed” and report my poker winnings under gambling income on my primary form?
As you obviously have found out, hobby income is not subject to Self-employment tax. Self-employment tax is Social Security (6.2%) and Medicare (1.45%) and then you have to match it. Therefore, Self-employment tax is 15.3% of your net income. A person that has their own business has to pay this tax in addition to Federal income tax on their net income (and any state tax, if applicable). But, if you are a hobby, this is not the case.
Although income from a hobby is not subject to Self-employment tax, it is taxed for Federal income tax, depending on your tax bracket. That is the good news. The bad news (possibly) is that the losses that can offset hobby income cannot be netted on the front page of your 1040 on the line that says “Other income. List type and amount.” The losses to offset that income can only be deducted on a Form called a Schedule A. This form is for itemized deductions.
Here is the bad part of all this. If you cannot itemize, you technically cannot offset those gambling winnings. It’s unfair but it’s the rule. If you have a substantial amount of losses, i.e. over about $10,000, then you may be able to itemize with just your gambling losses.
So you do not know if you can itemize or you have no clue what this means? Basically, the IRS lets you take a “standard deduction” on your return or you can itemize your deductions. The standard deduction amount depends on if you are single, married filing joint, married filling separate, head of household, or if you are a qualifying widow. The IRS lets you use the greater of the standard deduction or the itemized amount for the most tax benefit.
How do you know which amount could be higher? You will want to calculate the numbers and see. Most people that itemize have the following expenses:
– Large amounts of out of pocket medical expenses
– Pay property taxes on a home/land etc.
– Have State tax withheld or paid in during the year
– Large purchases where sales tax was paid
– Have a mortgage and pay interest on that mortgage
– Have made both cash and non-cash contributions (clothing and other similar donations)
– Have a substantial amount of business expenses that have not been reimbursed
– Gambling losses
The above items are some of the frequently itemized deductions. There are more deductions that can add to the total. The best way to know is look at Schedule A and the instructions to better understand what could help you make this determination.
Again, if you see that the standard deduction amount is higher after adding these items together, then it is in your best interest to use the standard deduction amount.
Unfortunately, you don’t entirely reap the benefits of your gambling losses. And, to add insult to injury, if your income is really high, and you can itemize, the itemized deductions get limited! Feels like you literally can’t “win,” doesn’t it?! The standard deduction numbers change each year. For 2008, if you are Married Filing Joint it is $10,900, for Single its $5,450, for Head of Household its $8,000 and for Married Filing Separate its $5,450.
–Last year I had a part time job and simply put gambling winnings in as other income. But, this year gambling has been my only source of income. Can I still file as unemployed since I do not consider myself a professional yet and am still looking for a career outside of poker? Or do I have to file as self-employed?
You don’t have to file as a professional gambler. Doing that is a benefit so the IRS is more than happy for you to file as a hobby or “Other Income” **Remember – Do not think you can net out your wins and losses on that “Other Income” line.
–If I file with the IRS as a pro online poker player, or even file for earnings as if it were a side job, does the Department of Justice or other law enforcement agencies have access to IRS records??
In theory, the IRS is not the morality police for the type of business you have. They just want to make sure you report your income. I wouldn’t suggest that you get terribly specific on your tax return. I would simply call your earnings “Gambling” which is not illegal. Its just best, in my opinion, to not specify. I said “in theory” but I have a feeling if you called your business “money laundering”, my theory might be incorrect and you might find “Big Brother” watching you!
RECORDKEEPING
-How do you need to keep track of your poker play in order to satisfy the IRS if you get audited?
If you are claiming that you have gambling losses, if you are audited, the IRS would most likely want you to prove that you really had those losses. By this, they would want to see how much time you spent playing poker, whether you are playing at a brick and mortar or on-line poker game. Also, you would want to keep up with tournaments that you are in, such as sit and goes, home cash games, satellites, etc. It is important to keep track of every bit of time that you are playing poker.
The easiest way to do this is to have a poker log book. It’s a basic spreadsheet that shows the date you played, how much time you played on that date, and the amount of money that you won or lost. I would also state where you were playing poker and what type of game you were playing (i.e. $10-20 limit or a tournament) I have an excel spreadsheet that is available on my website that you can download at pokerdeductions.com. You can also use poker tracker.
-I’m disorganized and know almost to the cent how much I won and lost in poker in 2009, I just may not know exactly how much in each session over the 365 days. Would it be better to try to piece together a diary from memory or just guess on how much net I profit that I had?
It really is best to try to re-create something. Now, remember that the IRS won’t want to see any proof unless they decide to audit you. If they did audit you, and you say that you know to the cent how much you won and lost, the IRS would want to know basically how you came up with the number for this. You don’t have to show each session but I would compile my any on-line records and have them in a file just in case. Those records may be enough to show. You would also want to list any brick and mortar wins and losses if you happen to play other than on-line.
-I keep up with every session I play, how much I bought in for (started with), how much I ended with (often 0), and the net (profit or loss). Can I not just put in that total as additional income on my tax form, have it added to my total income and then tax derived there from? After all, that is what it is, additional income.
Well, it’s not good news here. The problem is that many gamblers think that because you have enough losses to offset winnings, there is no reason to report either to the IRS. YOU CANNOT NET THESE TOGETHER AND NOT REPORT THEM! You also cannot net them together either. They, unfortunately, have to be separated.
There was a court case about this exact situation involving a judge that was a hobby gambler. The judge testified in tax court that he thought he could “net out” his gambling wins & losses and if losses exceeded wins, nothing needed to be reported on the return. The end result is that the jury found that he willfully failed to report both gambling income and gambling losses. The Court of Appeals upheld the conviction. (US vs. Scholl, No. 97-10143, 97-10248)
A little harsh, yes, but my opinion is that the IRS was making an example out of him for other gamblers. Unfortunately it set a precedent.
-I haven’t kept track of anything. I’ve won a good amount but as far as how much I’ve lost vs how much I’ve won, I have not a clue. What do I do if my record keeping absolutely stinks?
It is best to try to re-create what you did as best you can. Believe it or not, the IRS requires you to keep a set of books and records for what you have listed on your tax return. Without SOMETHING, the IRS could disallow your expenses in an audit.
-Do we really need to do all this session tracking? Lets say I withdrawal 10% of my online stack each month, or, let’s say I withdrawal everything over a certain limit.
No, you have to report what you made, not what you withdrew. You have to analyze your wins and losses as separate components. This sounds harsh but if you make money and don’t report it, you are committing fraud in the eyes of the IRS. It would be the same principal as if you made money and you wanted to not report it because you haven’t spent it yet!
ONLINE AND HOME GAMES
-If I am an 18 year old non-professional poker player, am I obligated to pay taxes for online poker winnings? Also am I obligated to pay taxes on home poker games winnings?
Yes, you are required to report any income on your tax return, whether you are a professional or not.
Remember, it becomes a criminal offense to sign a tax return that is incorrect and untrue. If the IRS can prove that you had intent to violate the law, this is considered fraud. Then life gets really ugly for you with the government. If they determine fraud, there is no statute of limitations. What this means is that the IRS can look back to the first day that you ever filed a tax return.
-Can home game losses be used on your tax return against your winnings? Obviously there is no paper trail of home games, so will an entry in the spreadsheet be sufficient? This same question can apply to casino cash games, since there is no receipt or paper trail.
Yes, home game wins and losses should be reported, regardless of legality. Remember, the only thing they got Al Capone with was tax evasion! The IRS doesn’t care if what you do is illegal or not, whether its playing on-line poker or drug smuggling. They want any income reported on your tax return.
Home games, as well as any other cash games should be kept up on a spreadsheet. It is important to get into the habit of keeping up with your poker play. I have told people that if they are doing it as they go, its easier than if you have to try to re-create it later.
Because there isn’t a paper trail, it is more of a reason to keep good records. Remember that the IRS looks at your backup if you are audited and the more thorough that you are, the better off you will be if they question your play.
-If I win a satellite for a tournament entry, do I have to declare it to the IRS? How should I do that if I don’t get the cash, but only get an entry ticket? What if the package includes the entry fee, transportation and spending money – are these treated differently? Are the rules the same for all satellites, or does the size of the prize matter.
Ok, this one will sound unfair but if you think about it, it will make sense.
Let’s say I pay $30 and after all is said and done, I win a seat to the WSOP valued at $10,000. If I play the WSOP and do not finish in the money, I basically won $10,000 and then lost $10,000 and am at a total loss of $30. The cost of the entry is the $10,000 that you won. When you receive the transportation and spending money, unfortunately this is also considered income.
You can offset this (if you are a pro) with the ACTUAL expenses that you incurred. Think about it this way. If they give you spending money of $500 and you go and buy clothes, this is income to you and not used toward poker. If you took the $500 and used it for a hotel room during the tournament, then you can offset (if you are a pro) this against the money you received. The rules are the same no matter what.
Income from any gambling, whether Poker Stars, Party Poker, etc., has to be claimed as income on your tax return.
STAKING/BACKING PLAYERS
-What are the rules for sharing tournament action?
If you are swapping or selling action in a tournament and you win, they are supposed to accept a Form 5754. You can find this Form along with the instructions on the IRS website at http://www.irs.gov/ . However, most of the casinos are not accepting this, even though they are supposed to. So, the best thing for you to do is make sure you have everyone’s address and social security number BEFORE you pay them. At the end of the year, you will need to prepare (for US Citizens), a Form 1099-MISC and put the amount you pay them in Box 3, Other Income.
-What if they don’t want to give me their Social Security Number and what if I don’t want to do that form?
If you decide not to prepare this Form, (or didn’t know about it until now) the entire amount that you won will have to be claimed on your tax return. That means that the person you paid technically can get away with not paying tax on it and you will have to take the brunt of it. The IRS will not let you deduct this since you didn’t prepare the paperwork to prove to them that someone else received the money. The best way to do this is to fill out that Form 5754 and keep it for your records, or even better, get a Form W-9 from the IRS website which will have the player filling out their name and Social Security number and there is a place where they actually need to sign the form saying that they are verifying that this is their complete and accurate information.
-When is this form due to the person and to the Government?
The form is due to the person by January 31st following the end of the year and to the Government by February 28th. You may want to get a CPA to help you as you have a “cover” Form to file with the IRS (Form 1096) and the copies have to been on their red forms.
TOURNAMENTS
-I play poker as a hobby. I was lucky and won a $12,000 package which included my $10,000 buy-in in addition to $2,000 to cover my plane ticket, hotel room and food. How does this work on my tax return.
Let’s assume that this is all you made for the year. You would claim the $12,000 as income and then you would deduct the $10,000 as gambling losses (assuming you weren’t “in the money” in the tournament). Unfortunately that is it. Even if you spend the $2,000 or more for your expenses, there is no way to write this off. You can ONLY do this if you consider your poker play as a business.
-Using the same example, meaning that I won the $12,000 package but I am a pro, how would I treat this now?
In this instance, let’s assume this is all your income and expenses for the year. We will assume that you played the tournament and did not make any money. Let’s also say that you ended up spending $1,500 for your hotel and plane trip and $500 for your meals. It looks as if you can write off the entire $12,000 income against $12,000 in expenses and gambling losses but here is the twist. Yes, your income that you would claim on your Schedule C is $12,000. Your expenses, however, are only $11,750. Why? Meals are only ½ deductible. Remember also to keep your receipts so that you can prove you spent the money. Otherwise, it would all be considered income.
FOREIGN ACCOUNTS
–What do I need to know about declaring foreign accounts?
From my research and inquiries lately, it has been determined that your on-line poker accounts are not necessarily BANK accounts but are considered an “on-line financial account”.
-How can Stars, Tilt, etc. be considered a foreign account? They have made it very clear to me in past emails that they are not a bank.
They may not be considered a bank, but in the eyes of the IRS, they are an on-line financial account. If you had more than $10k on any poker site at any given time, the IRS expects you to fill out a form called a Form 90-22.1. You can find a copy of this on http://www.irs.gov/. This form is due every year, separately from your tax return, by June 30th.
–What if I don’t file this form?
The penalties for this if you ever get caught on it are about $100,000. In my eyes, it is not worth the risk by an means.
WITHHOLDING ON WINNINGS BY THE CASINO (RULE IN EFFECT 3/4/08)
The IRS is taking note of poker players now. They have taken the first step to try to make sure poker players pay their taxes. This new rule came out on 9/4/07. The rule states that any poker tournament sponsor (including casinos) must withhold (and report) 25% on proceeds of more than $5,000 paid to tournament winners. It defines proceeds as reducing the amount received by the amount of the wager. There is an exception so read below. This rule is to take effect on 3/4/08, which is 6 months from the date that they wrote the rule. This rule specifically targets poker players.
I have spoken to the person that actually drafted this rule for Congress. She and I spent time in going over the intent of this rule and how it should be interpreted.
I have taken questions from the forum and then made up others as well so players may better understand the impact this rule will have in the poker community:
–Does this change anything from how things have been?
The intent of this rule is to make sure that the casinos have a verifiable social. If the casinos do not do this, then they need to withhold the 25%.
-What is a verifiable social?
There is a form called a Form W-9 where you are writing down your name, address and social. You sign the form stating that under penalties of perjury, you have written down the correct social. If you do not put the correct number, this would be fraud.
-So, if I sign this form, the casino will not take out the 25%?
According to my source at the IRS, they say that if the casino or tournament sponsor has this form in place, then they do not have to withhold the 25%. If you refuse to sign this form, then they will take out the 25%.
-If nothing really changes on this, they why is this rule in place and all the hype?
I was told by the IRS source that the reason for doing this is that people were pooling money, such as in tournaments, and trying to get out of having a Form W2G and giving their socials. They basically are saying if you don’t get the winner to verify with a signature regarding their social, then the burden is on you that you have to withhold.
–How does this affect online tournaments?
As we all know, at this time the online sites are not located in the U.S. and are not under the rules of the IRS directly. As things stand right now, the only way the online sites could enforce this rule is if they have our social security numbers on file, which they do not at this time. Since they are not under US law, they do not have to do this.
–Does the brick and morter tournament sponsor tax 25% of winnings or 25% of your profit from that tournament if you don’t fill out the form?
They report and tax the profit. For example, you pay $10,000 as a buy-in for a tournament event. You cash at $50,000. The casino will take into account your buy-in and subtract this from your winnings. So, they would take out 25% from $40,000, which would be $10,000.
–What kind of withholding is this, Federal or State?
They are withholding Federal Income Taxes from the net winnings.
-How does this work, i.e. how do I get “credit” for paying this money into to the IRS if the casino withholds it?
The casino or tournament sponsor is required to send this money into the IRS on your behalf. You will receive a Form W2G which will have your name, address and social security number. They will then report the net amount of winnings in Box 1 and then the amount they withheld in Box 2. The IRS will have a record based on your social security number and the amount they withheld will show in your “account”, similar to when you have a job where you are issued a Form W2.
-What if they have my social wrong on the form? Do I get out of claiming the winnings?
Besides the legal ramifications of doing this, it is very important that you make sure they have the right number on the Form W2G. If you don’t, you won’t get any credit for the 25% that they withhold. Remember, you are signing under penalties of perjury, which is a felony, that this is correct.
–Instead of taking my winnings, I want to donate them to charity? Can I do that?
Even if you want to donate, the casinos and tournament sponsors are required to give the winner, which is you, the form and take out the 25%. The best thing to do in this case is to then take the money and donate it to a charity that is listed as a non-profit with the IRS. Be sure that the charity sends you a letter stating the amount you donated so that you have proof to the IRS if you are audited. Most of the charities that are non-profit can be found in a list on the IRS website. Go to www.irs.gov and do a search for Publication 78. Any charity that is considered non-profit should have a letter showing this that is from the IRS. Always be sure about this or the deduction can be disallowed.
–I am not a U.S. Citizen but I come to the U.S. often to play in tournaments. What should I do in light of this new rule?
My recommendation is that any foreign player that plays in a tournament, and would like to try to recover part of the withholding, should obtain the individual taxpayer identification number (ITIN). This number is for tax use only. By having this number, you can give it to the casino (I would keep the IRS document showing this number handy for their inspection) and they will make sure the IRS credits the 25% to you. You then would need to file what is called a non-resident alien tax return to recoup some or most of the withholding.
–How does a foreign player apply for a taxpayer number and how do they recover part of the 25% that was withheld?
You would need to fill out a Form W-7, which you can find on the IRS website at http://www.irs.gov/. Remember, if you are eligible for a Social Security number, this form is not for you. You would want to fill out and submit this form ASAP. The process to get your ITIN takes at least 4-6 weeks. You then would file a tax return after the end of the year, due by April 15th, on a Form 1040NR.
–How could this new rule affect people that satellite into the events?
It shouldn’t matter – the casino/sponsor should still deduct the actual tournament buy-in from the total amount you won and then if it’s over $5,000, take out the 25% – this is ONLY if you refuse to sign the Form W-9 (which I recommend that you do the form and sign it)
-In the past, the casinos have paid me in chips when I cash in a tournament. Will that still be the case?
Yes, from what I have heard.
MISCELLANEOUS
Reporting poker income properly per the Federal requirements seems to cause a problem on my State income tax. If I report Federal Income properly (gross poker winnings or inflows reported as ‘income’, poker losses or outflows then taken as a ‘deduction’), then the gross amount of poker revenue hits the top line of your State return and since you cannot deduct poker losses you must pay tax on poker revenue and not just your winnings. Netting your winnings on your Federal return solves this problem for the State return, but reporting only net winnings is not permitted on your Federal return.
Tax law states that you cannot net your wins and losses – plain and simple. The problem is that many gamblers think that because you have enough losses to offset winnings, there is no reason to report either to the IRS. YOU CANNOT NET THESE TOGETHER AND NOT REPORT THEM! You also cannot net them together either. They, unfortunately, have to be separated.
Although this hurts you on the State Return, there is really no other way around it.
-What are some links to the actual tax laws so that I can look up specifics about these rules?
You have the main IRS website at http://www.irs.gov/. Then you have http://business.usa.gov/.
Unfortunately most of the tax laws with opinions are in research packages. Such companies are RIA and TaxTools.
-When it comes to the end of the year and I am filling out my tax return, will I be able to write off other forms of gambling (sports betting, pit games, etc.) against my poker winnings?
Yes, you can add up all types of gambling income and offset it with all types of gambling losses, be it legal or illegal!
-Can you clarify what types of records that you need to show for both wins and losses in poker, both online and in casinos?
The easiest way is to use a spreadsheet and track your activity that way. I have an excel spreadsheet that you can download that is on my website at http://www.pokerdeductions.com/ that will give you a good idea of what you need to keep track of.
-I have an accountant but they don’t seem to know a lot about this. How can I know what is going on with poker players and the IRS as they happen, such as new rules that pop up?
To my knowledge, I am the only CPA that specializes in poker players. I am on top of any new laws that come about that target poker or gambling. If you would like to be on my list for any news, email me directly at annm@johnstoncpas.com and put Poker as the subject line.
EXAMPLE – FILING AS A PRO VS. HOBBY ON YOUR TAX RETURN
Let’s try to break this down so that you can see how it works on your actual tax return. It’s important to realize what a difference this can make in your tax situation.
Here is the scenario: Your poker is a hobby. You are single without children. You made $40,000 in winnings, $20,000 in losses and spent $10,000 for your other expenses such as hotels and plane tickets (let’s don’t assume any meals in this example). This is all you had.
For your 2005 Tax Return, your income is $40,000, reported on line 21 as Other Income and the $20,000 would go on your Itemized Deduction sheet under Gambling Losses. You would get a personal exemption for yourself of $3,200 so your taxable income is $16,800. The Federal tax on this is $2,159, which is what you would owe the IRS.
Now, lets take the same scenario above except now you are a poker pro and treating your poker playing as a business. Here is how it looks now.
For your 2005 Tax Return, you report all of the information on a Form called a Schedule C, Profit or Loss from Business. You would show $40,000 as income, the $20,000 of wagering losses on the line for Cost of Goods Sold, and then claim the $10,000 as Travel expense. This gives you net income of $10,000. This $10,000 is subject to self-employment tax which is Form SE.
So, $10,000 shows up on the front of your Form 1040 on line 12, which flows from the Schedule C that you prepared. You will have to pay self-employment tax of $1,413. This is calculated on Form SE as the $10,000 less 7.65%, and then you multiply that number by the self-employment tax rate of 15.3%. The IRS gives you a deduction of ½ of this number, which is $707 on the front of your return on line 27. Now your income is $9,293. You get a standard deduction of $5,000 since you are single, and you get the exemption for yourself of $3,200. Now your taxable income is $1,093 and your Federal tax on this is $109. Remember that you now have to add your self-employment tax to this of $1,413 which goes on Line 58 (this comes from the Form SE). Now you owe the IRS $1,522.
See the difference in claiming as a pro versus a hobby. With this very basic scenario, your tax savings is $637. Believe me this amount is nothing compared to the larger numbers you will probably have. The more money you make, the more the tax savings as a professional poker player. Being able to write off expenses besides your wagering really makes a difference.
Being that I specialize in poker players, and am a player myself, I can help anyone with their situation. Please visit my website athttp://www.pokerdeductions.com/ for any further information.
