Poker Pro Tax question

[Cent]

Hello All,

I've recently become a professional poker player, and have questions regarding taxes. I understand most pros don't report their winnings to the IRS. What's the best way to go about this?

thanks in advance,
Cent

[kslghost]

Uh, pros definitely report their winnings because since they deal in large dollar amounts, their winnings actually get reported to the IRS. You have to fill out forms and crap.

You may be referring to the fact, (as I've apparently heard) that pros report net winnings, not winning sessions. This means that they fall under a small tax bracket than they would have reporting winning sessions and taking deductions from losing ones.

I'm far from an expert on this, but I'm pretty damn sure they do report their winnings (or end up like Matusow... not that he went there for taxes...)

[Duck Rabbit]

When reporting your earnings for the year, do you only report what you have withdrawn from your online account and into netteller or bank? If not that way, how do you keep an accurate record of exactly how much you made in the year?

[LeadbellyDan]

I thought you don't have to pay tax on any gambling winnings. This may only be in the UK.

[Zele]

You understand wrong. In the US, anyone (pro or not) who does not report income from gambling is committing a possibly serious crime.

[Lottery Larry]

[ QUOTE ]
Hello All,

I've recently become a professional poker player, and have questions regarding taxes. I understand most pros don't report their winnings to the IRS. What's the best way to go about this?


[/ QUOTE ]

Best way to go about not reporting your winnings? Don't duck taxes, that's the best way.

[Guthrie]

The best way to not report your winnings to the IRS:

Don't report your winnings to the IRS.

[cardsharkk04]

Not to hijack, but when I went to an accountant I showed her my transactions histories from party, we just added up all my deposits and withdrawals (assume zero in my pp acount on jan.31) and that was my taxable income on the 1040. Seemed incredibly simple. But I thought that you were supposed to keep track of and report the winnings/losses from every session, not the deposits and withdrawals. Does my accountant know what she is doing??? Could I get screwed over? It seems like the number would be the same as long as there is nothing in my account at the end of the year.

[BGnight]

Thread is offically hijacked! I went to a CPA to pay my last years winnings. I had all my neteller inflows and outlflows and what pokertracker session summaries I was able to scrounge up. She consulted with her partners and decided just to net it and put it under other income as "gambling winnings". This kinda surprised me, but I'm not gonna argue since I have a large professional firm backing me if I get audited. She made copies of my neteller and my PT sessions and said these are back ups to show how we came up w/ the numbers.

[DING-DONG YO]

Alright, CPA weigh in. Sorry to continue the hijack.

technically you are supposed to

1 - use the gross method and report wins as other income and losses as an itemized deduction or

2 - file a schedule C.

Scenarion 1 drawbacks - Your income will push you into a much higher tax bracket and the itemized deductions will wipe out your standard deduction (if you use it) and you may be subject to AMT due to your large deductions in relation to your large income.

Scenario 2 drawbacks - An extra 15% off the top for self-employment tax

Those are the only 2 100% kosher ways to do it.

Now, many CPAs have been recommending that people just net their winnings. They have done this for probably the following reasons:

1 - (assumption) You are in a VERY VERY low risk category for an audit if your combined AGI (income) is less than 100K.

2 - The firm feels confident that if the IRS was to challenge this, the firm could either

A - plead ignorance, calculate it using scenario 1 and pay the difference. "Ooops, our bad" approach
B - A very headstrong CPA would realize there is probably not a judge in the country that would compel a taxpayer to follow scenario 1. The current system may be the law, but is grossly inequitable as there is not a single other business activity that requires income to be reported in this way. The "good luck, IRS, take us to court and find a judge that will enfore this" approach. Remember tax court judges DO NOT work for the IRS.

I would like to hear if anyone who has an AGI over 100K has still been recommended to net by a CPA.

Hope this helps some.

[BGnight]

Yeah, I kinda assumed this is why she did it this way. I am now filing under a schedule C for 2006 and paying estimated payments. Seems much easier. I've been reading all these tax threads and see so much confusion. I am still relatively clueless so thats why I'm being honest w/ my CPA and letting her make the decisions.
I think her and her partners decided to lump all my online poker into one session. lol. After all the IRS doesn't have a clearcut definition of a session and I'm sure online poker just opens it to more vague interpretations.

[BigBry]

If you take route2 and file a schedule C, are you now allowed to have the "perks" of business as well. For example, could you set up a SEP or deduct the cost of travel to a B&M room?

[BGnight]

[ QUOTE ]
If you take route2 and file a schedule C, are you now allowed to have the "perks" of business as well. For example, could you set up a SEP or deduct the cost of travel to a B&M room?

[/ QUOTE ]

According to my CPA, yes. Meals, mileage, internet access, computer, etc.

[pokerlaw]

[ QUOTE ]

B - A very headstrong CPA would realize there is probably not a judge in the country that would compel a taxpayer to follow scenario 1. The current system may be the law, but is grossly inequitable as there is not a single other business activity that requires income to be reported in this way. The "good luck, IRS, take us to court and find a judge that will enfore this" approach. Remember tax court judges DO NOT work for the IRS.


[/ QUOTE ]

As someone who is studying tax law, I couldnt agree with this analysis more. The fact that gambling gets treated so punitively combined w/ a very very low risk of audit makes this the preferable solution. I mean, its not like you are fudging the most important #, gross income.

[mj2]

[ QUOTE ]
[ QUOTE ]
If you take route2 and file a schedule C, are you now allowed to have the "perks" of business as well. For example, could you set up a SEP or deduct the cost of travel to a B&M room?

[/ QUOTE ]

According to my CPA, yes. Meals, mileage, internet access, computer, etc.

[/ QUOTE ]

there is absolutely no way that deducting these expenses will offset the additional 15% self-employment tax you have to pay for filing a schedule c. i'm not sure why so many people suggest this.

[broiler]

Actually, it is very possible that you can overcome the 15.3% self-employment tax. In fact, the larger your poker income, the easier it becomes.

You have to remember that you get a deduction for half of the SE tax that you pay, which makes the effective rate much lower than 15%. The ability to have a retirement plan based upon your income is another large benefit that can eliminate the difference in tax. Your health insurance also gets preferencial treatment by filing as a schedule C. Finally, people that live in a state that does not allow the full (or any) deduction for gambling losses can also benefit greatly from filing a schedule C.

I am willing to admit that not everyone will be able to overcome the SE tax, but it is not as impossible as you might think.

[Niediam]

And of course in theory you will get a lot of it back in Social Security someday in the very distant future. /images/graemlins/smile.gif

[DING-DONG YO]

[ QUOTE ]
[ QUOTE ]

B - A very headstrong CPA would realize there is probably not a judge in the country that would compel a taxpayer to follow scenario 1. The current system may be the law, but is grossly inequitable as there is not a single other business activity that requires income to be reported in this way. The "good luck, IRS, take us to court and find a judge that will enfore this" approach. Remember tax court judges DO NOT work for the IRS.


[/ QUOTE ]

As someone who is studying tax law, I couldnt agree with this analysis more. The fact that gambling gets treated so punitively combined w/ a very very low risk of audit makes this the preferable solution. I mean, its not like you are fudging the most important #, gross income.

[/ QUOTE ]

Pokerlaw, what you recommend to someone who makes over 100K at their "real" job but still has some poker income on the side? Would it still be advisable to net total sessions for the year in other income? I know the IRS will focus more on higher income individuals and you run the risk of looking less like the "little guy just trying to do the right thing while not getting screwed" and more like the "rich guy getting tricky" in the eyes of the court.

I'd love to hear your opinion.

[Megenoita]

I made like 13.5k in poker this past year, and in the options people have presented in this thread, it would be best for me to:

1. Claim as "other" even though it's illegal.
2. File a Schedule C.
3. Gross method

The reason that a Schedule C is better for me than the gross method is because you may not realize it, but your state taxes will be more when your gross is over $100k (even though you take huge losses, that gross really hurts). A Schedule C still would be about the same or more except that I had significant deductions such as my lap top which I use exclusively for poker, and my monitor. But deductions ARE overrated, as you don't get a whole % on them and in internet poker there really aren't that many.

Most people can't file a Schedule C for small income because they make too much money in their full time job, but I'm dirt poor so it's cool for me /images/graemlins/smile.gif.

A Schedule C would also be good if I make a lot of money this upcoming year, though the % is still very high that I'd have to pay because deductions wont put a dent in the overall net.

General question--the quarterly estimated payments...when are they due? How do I go about making those in 2006?

[MyTurn2Raise]

[ QUOTE ]
[ QUOTE ]
If you take route2 and file a schedule C, are you now allowed to have the "perks" of business as well. For example, could you set up a SEP or deduct the cost of travel to a B&M room?

[/ QUOTE ]

According to my CPA, yes. Meals, mileage, internet access, computer, etc.

[/ QUOTE ]

you can deduct internet access and computer costs if they are for poker only. If you are using the computer and internet access for personal business as well, it is not deductable.

[Megenoita]

Actually, the % that you use it for business is deductable. And if you make good money in poker, these deductions wont put a dent in what you owe UNLESS you do a lot of live play as the meals, travel, gas, etc. add up.

[BGnight]

[ QUOTE ]


General question--the quarterly estimated payments...when are they due? How do I go about making those in 2006?

[/ QUOTE ]

The first one is due by April 17th. Your CPA gives you vouchers and the estimated quarterly total off your last years gross income. You write a check to state and feds and mail em.

[Niediam]

[ QUOTE ]
[ QUOTE ]


General question--the quarterly estimated payments...when are they due? How do I go about making those in 2006?

[/ QUOTE ]

Do you happen to know what one is supposed to do if there is nothing last year to base things on?

The first one is due by April 17th. Your CPA gives you vouchers and the estimated quarterly total off your last years gross income. You write a check to state and feds and mail em.

[/ QUOTE ]

[BGnight]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]


General question--the quarterly estimated payments...when are they due? How do I go about making those in 2006?

[/ QUOTE ]

Do you happen to know what one is supposed to do if there is nothing last year to base things on?

The first one is due by April 17th. Your CPA gives you vouchers and the estimated quarterly total off your last years gross income. You write a check to state and feds and mail em.

[/ QUOTE ]

[/ QUOTE ]

No, I'd talk to an accountant. It's $200 well spent if you make any sort of money you plan on claiming.

[HEK]

Well here's my situation...

My info:
-I had a full time job last year where I made ~$45,000
-My wife had a full time job last year where she made ~$35,000
-we have one child to declare
-I made around $175,000 in 2005 from Poker. All records are in pokertracker
-I wasn't expecting to make so much money in '05 from poker. That's why I never thought about paying quarterlies. Things didn't really heat up for me until October of '05.
-I now play full time. I left my job at the end of January of this year.
-I only have between $3000 and $4000 of expenses from '05 that I can write off (deduct? I'm not sure of the correct term. These are things I have receipts for)

Filing a schedule C is filing as a pro right? Should I do so even though I had a full time job last year?

Which route would be better for me do you think?

[driller]

Your cpa is clearly not following the tax code. I hope she handles the rest of your business better than this. The fact that she didn't bother to research the matter a little more carefully would disturb me.

[driller]

[ QUOTE ]
Now, many CPAs have been recommending that people just net their winnings. They have done this for probably the following reasons:

1 - (assumption) You are in a VERY VERY low risk category for an audit if your combined AGI (income) is less than 100K.

2 - The firm feels confident that if the IRS was to challenge this, the firm could either

A - plead ignorance, calculate it using scenario 1 and pay the difference. "Ooops, our bad" approach
B - A very headstrong CPA would realize there is probably not a judge in the country that would compel a taxpayer to follow scenario 1. The current system may be the law, but is grossly inequitable as there is not a single other business activity that requires income to be reported in this way. The "good luck, IRS, take us to court and find a judge that will enfore this" approach. Remember tax court judges DO NOT work for the IRS.


[/ QUOTE ]

Just be sure to use a CPA, so they can take the heat and pay the penalties. I use Turbo Tax, so I am trying to be "technically" correct. Plus my agi is more than 300k.

I agree that the slim chance of being audited plus the opportunity to just pay the difference if caught probably makes this the optimum approach.

[hencole]

So how much are you guys in the US paying in tax on average?

It just seems to me that it would be far, far harder to go pro in the US than in the UK. Not only do you get hit by rake, but tax as well!

[DING-DONG YO]

[ QUOTE ]

1 - (assumption) You are in a VERY VERY low risk category for an audit if your combined AGI (income) is less than 100K.


[/ QUOTE ]

[ QUOTE ]

Just be sure to use a CPA, so they can take the heat and pay the penalties. I use Turbo Tax, so I am trying to be "technically" correct. Plus my agi is more than 300k.


[/ QUOTE ]

First off, the example above was based on a <100K AGI. You just stated you make over 300k.

Second off, just because a CPA tells you to do it doesn't mean you can just wash your hands of responsibility. They are your taxes and your responsibility. You could sue a CPA and the IRS may fine them as well, but you're still facing the music too.

And third off, if you make over 300K AGI, I would find a pretty heavy hitter (IRS and tax law experience) to help you.

[Megenoita]

Driller, when you say your AGI, you are talking about total wins before losses are being considered?

[driller]

Your AGI is your Adjusted Gross Income. The poker component of your AGI would be the sum of your winning sessions. So yes, that would be the total wins before deducting any losing sessions.

[driller]

If it weren't for poker my agi would be more reasonable and come mostly from salary. My taxes are actually pretty simple.

From what I'm reading, unless a cpa has experience with gambling issues, they don't know much more about than you or I do.

I agree with you that if I want to get a little fancier, I will need some professional help.

[Megenoita]

From my experience, I also don't see how CPA's know much more than we do about our taxes. I do wonder this, though. Ed Miller has stated a few times that if you net 6 figures in poker, you're probably going to look at paying 25% in taxes. When I did a simulation on Turbotax, it estimated that my taxes would be around 32.8% if I made 6 figures, and about 27% if I net $50k. This is assuming a Schedule C.

Unless you play live, deductions wont make much of a difference. So I'm wondering if there's something CPA's know that I don't that helps me pay 9% less.

[Ed Miller]

[ QUOTE ]
So I'm wondering if there's something CPA's know that I don't that helps me pay 9% less.

[/ QUOTE ]

Put money in a SEP-IRA.

[DING-DONG YO]

You're paying a lot with schedule C because you're paying 15% employment taxes in addition to your income taxes.

I don't know of anyone that is paying 9%. Where did you hear that?

[Megenoita]

9% less than 33%, i.e., around 25%.

Ed replied saying to open up a SEP-IRA. From what I've just read about these, it seems that it does effectively reduce the % we pay about 9%.

Something I haven't found about the SEP-IRA's...can we withdraw any time? For instance, if I make $120k the next 3 years, but then I'm done with poker, can I withdraw that money that I put into my retirement?

[DING-DONG YO]

Sorry, misread the 9% comment.

And an early withdrawal (before you're 59.5) from an IRA would incur a 10% penalty (I think) on top of regular income taxes on the whole amount. Generally not a good thing to do.

[Megenoita]

Yikes...that sucks.

Is there any other way (aside from a Schedule C) to claim your winnings from poker that is 100% legal, which would incur lower taxes?

[Megenoita]

Oh also, my Mom keeps on telling me that the self-employment tax, although it's 15%, is actually only 7.5% for some reason...my father is a dentist and she has always done his taxes. Any idea about this 7.5% that is deductable?

[Holden97]

Many self-employed people look at the 7.5% as the additional tax, because employees pay 7.65% on income below the FICA wage limit anyway. Look at a W-2 and you'll see the employee portion broken up between the FICA and Medicare boxes.

And yes, there is a subtraction on page 1 ('above the line') for what is considered the employer 7.65% portion.

[DING-DONG YO]

[ QUOTE ]
Oh also, my Mom keeps on telling me that the self-employment tax, although it's 15%, is actually only 7.5% for some reason...my father is a dentist and she has always done his taxes. Any idea about this 7.5% that is deductable?

[/ QUOTE ]

When you work for someone else, they pay half (roughly 7.5%) and you pay half.

When you work for yourself (self-employed), you have to pay both. Your Mom is thinking about it from the standpoint of an employer/employee relationship.

[DING-DONG YO]

[ QUOTE ]
Many self-employed people look at the 7.5% as the additional tax, because employees pay 7.65% on income below the FICA wage limit anyway. Look at a W-2 and you'll see the employee portion broken up between the FICA and Medicare boxes.

And yes, there is a subtraction on page 1 ('above the line') for what is considered the employer 7.65% portion.

[/ QUOTE ]

?

Are you saying you can deduct the employer portion of the employment taxes you pay? Please clarify. I don't think that is correct but I may not understand what you are saying.

[broiler]

I am pretty sure that he is talking about the deduction allowed for half of the SE tax paid (line 27). This deduction makes the effective rate of tax substatially less than the 15.3% rate, but doesn't cut it in half. Every computer program will take this deduction for those filing schedule C.

[Holden97]

Boiler stated it more clearly than I did when he pointed out the deduction on line 27 for SE taxes.

The point I was trying to respond to about an additional 7.5% is that everybody who gets a W-2 and isn't over the FICA wage limit is already paying 7.65%, so when you compare poker earnings reported on schedule C to W-2 wage income, the increase is only 7.65% (less the tax impact of the line 27 deduction). However, the increase in SE tax by reporting on schedule C vs. as other income is 15.3% up to the FICA wage limit and 2.9% thereafter (less the tax impact of the line 27 deduction).

[Megenoita]

Right, but isn't it technically not allowed to report gambling winnings under "other"?

[Holden97]

[ QUOTE ]
Right, but isn't it technically not allowed for a professional poker player to report gambling winnings under "other"?

[/ QUOTE ]

I added some words to your question to make it easier to answer yes.

For a truly recreational player, other income is likely the right place to report.

[Megenoita]

If you don't mind Holden, do you know where I can read about this? Like, where I can read about how we're supposed to file depending on being recreational/pro?

Thanks.

[AAAA]

all but your base phone service can be deducted. your cable tv is there for the express purpose of watching poker on cable channels......your cell phone is there so you can be notified of good games when away from home. most of your car miles can be deducted if you are always aware of driving to pick up office supplies or driving to and from casinos. all your computer equipemnt and video equipment can be tied into some business purpose. your office should be a comfortable place, and any items that you purchase for your office are deductible.

keep track of pens and pencils and of course most of your magazine subscriptions could be to search for new poker opportunities. even more can be considered if you are an affiliate who is looking for opportunities to market your services...trips to the grocery store can be opportunities to look for referrals.

be aware that IRS might disallow some of the above, but our law is a voluntary system that will not incur penalties unless there is obvious intent to defraud. It is legal to avoid, but not to evade taxation. In other words be aggressive, and be sure to put any amount away to pay if you are incorrect!

[AAAA]

there seem to be more and more options to get money from seps without the penalty. i believe things like medical, education and home down payment may be eligible for preferential treatment even if you aren't 59.5.

Please check on these if you intent to try. There may be specific restrictions, but it is worth looking into.

Does anyone know if you can make it cost effective to borrow against the money for other reasons?

[Megenoita]

Most of these are clearly excessive and obvious BS. When you claim something like car miles, you need to report what % you use the car. For a player who doesn't play much live, this means a tiny % if any. And all the office supplies don't add up to much, nor does any other expense if you are making 6 figures or close.

[Megenoita]

[ QUOTE ]
there seem to be more and more options to get money from seps without the penalty. i believe things like medical, education and home down payment may be eligible for preferential treatment even if you aren't 59.5.

Please check on these if you intent to try. There may be specific restrictions, but it is worth looking into.

Does anyone know if you can make it cost effective to borrow against the money for other reasons?

[/ QUOTE ]

Even if you can take the money out without penalties, will the tax on taking it out still be strong?

[DING-DONG YO]

[ QUOTE ]
Even if you can take the money out without penalties, will the tax on taking it out still be strong?

[/ QUOTE ]

Magenoita, I hate to get testy, but you continually ask the same questions over and over again.

YOU PAY REGULAR INCOME TAX ON ANYTHING YOU TAKE OUT OF AN IRA. If you are younger than 59.5 and you take this money out, you pay an additional(as in, addition to the income tax) 10%

[ QUOTE ]
Most of these are clearly excessive and obvious BS. (referring to AAAA's suggestions for business deductions)

[/ QUOTE ]

I will agree with you here. They are very excessive. Remember, home office and huge small business deductions are a BIG audit red flag.

Remember, big red flag doesn't mean illegal. It means it is heavily abused and the IRS knows it. If you're using the deduction legitmitally and can back it, then go ahead and use it. It's there to be used, not abused.

[Megenoita]

Ding-Dong, I just read all of my posts in this thread, and I have not asked the same question even once.

I just talked to Fidelity today and they said that, like someone else posted, higher education or medical bills which exceed 7.5% of your income can be taken out of the IRA without penalty, and he said there may be more ways--check out IRS form 5329.

[kibble420]

[ QUOTE ]
Most of these are clearly excessive and obvious BS. When you claim something like car miles, you need to report what % you use the car. For a player who doesn't play much live, this means a tiny % if any. And all the office supplies don't add up to much, nor does any other expense if you are making 6 figures or close.

[/ QUOTE ]

Using the standard mileage deduction negates the need to report what % you use your car. Were you to use a % you would deduct actual expenses rather than the standard mileage deduction.

[AAAA]

you have no obligation to pay quarterly the first year! after that, you need to pay quarterly if your liability for self employment was over $500 the previous year.

[AAAA]

i have filed this way for 10 years or more. as far as whether it is reasonable, consider that most businesses make a maximum of 10% net profit after expenses. Soooo, what is unreasonable about spending 90% of your income to support your business?

Think also that you are entitled to all miles you use for business, and there is no reason that you have to be particularly efficient in your trips. also nothing that says you can't pick up your personal items when you go to buy business items. as far as vacations, if you live a lifestyle that makes business a normal part of living you will find business reasons for almost everything you do. just let it become a habit!

[Megenoita]

I can see filing that way, sort of...but most online players don't do much traveling, you know? My game is exclusively online, though this year I do plan on venturing out some to live games. I think traveling MORE is a great way to lower taxes in our profession.

[Holden97]

Start with these links and explore the interent. Don't miss the information in publicatios at www.irs.gov (http://www.irs.gov)

http://laws.findlaw.com/us/480/23.html

http://www.taxabletalk.com/posts/1139867710.shtml

[AAAA]

getting in the habit of discussing poker everytime you go in public is the very best way to be allowed to deduct mileage expenses. Talk to people in the grocery line, at the bank, the convenience store, the gas station...you get the drift. Have business cards made out with your name and a website address. The cost for that is absolutely minimal, and can save you tremendously in taxes and encourage you to think about it everytime you jump in the car.

You can get some income to run through affiliate accounts if you structure it properly and it will not look like you don't have any income, because IRS won't let you deduct more than you "made"

The really remarkable thing about this is that after a while, you will find you have business skills you never knew about, and you will actually find ways to make a profit at almost anything...and that benefits IRS and you!

[Bigwig]

Just to be sure, as I'm finishing up my taxes tomorrow.

I claim the income on 1040 as 'Other Income' and deduct the losses under the itemized section. Correct?

What a mess. I also own a small business I attend to 5-10 hours per week, so I also have Schedule C income. Gah.

[AAAA]

just a note, I don't even start doing taxes until sometime in August, and this year it might be September.

There is an automatic extension that is allowed, and a tax advisor mentioned that more people get audited from the group that files by April 15th (or 17th this year) than from the group that uses the extension. Evidently IRS has quotas and they fill the quotas as soon as they can, and don't bug the people as often who file later!

[sledghammer]

[ QUOTE ]
just a note, I don't even start doing taxes until sometime in August, and this year it might be September.

There is an automatic extension that is allowed, and a tax advisor mentioned that more people get audited from the group that files by April 15th (or 17th this year) than from the group that uses the extension. Evidently IRS has quotas and they fill the quotas as soon as they can, and don't bug the people as often who file later!

[/ QUOTE ]

When you file for an extension, you have to provide an estimate of your tax liability, correct? How precise do you need to be in this estimate? I haven't decided how to file yet, so the amount could vary significantly. Do they really not care, as long as its in the general ballpark?

[AAAA]

you just have to pay 25% per quarter...of last year, or 27.5% if your AGI is over $150,000 from what i just learned in another thread.