Another Tax Question

[GoodOL]

I have just searched 100's of posts but haven't found the answers to my questions. If you know of a reputable CPA in the Boston area that has a strong understanding of gambling income, could you please refer.

My questions:
1. I understand there are two ways to file gambling income...the recreational method (winnings reported as 'other income' on 1040 and losses on Schedule A) and the professional method (winnings and losses reported as a business on Schedule C). I make my income solely from poker, so am I required by law to file using the professional method (I want to use the recreational method because I don't have many expenses to deduct and can avoid the self employment tax)?

2. I understand that one cannot simply report NET winnings (although, this makes the most sense...if no losses are reported...no burden of proof). However, if filing using the recreational method where losses are reported on Schedule A...Massachusetts will not allow these deductions creating a grossly inflated income. How does a Mass. resident resolve these conflicting laws?

[KaneKungFu123]

1. You can just file recreational if its your first year with gambling winnings. If you do it 5 years in a row, you might have a problem though.

[tiltaholic]

[ QUOTE ]
I have just searched 100's of posts but haven't found the answers to my questions. If you know of a reputable CPA in the Boston area that has a strong understanding of gambling income, could you please refer.

My questions:
1. I understand there are two ways to file gambling income...the recreational method (winnings reported as 'other income' on 1040 and losses on Schedule A) and the professional method (winnings and losses reported as a business on Schedule C). I make my income solely from poker, so am I required by law to file using the professional method (I want to use the recreational method because I don't have many expenses to deduct and can avoid the self employment tax)?

2. I understand that one cannot simply report NET winnings (although, this makes the most sense...if no losses are reported...no burden of proof). However, if filing using the recreational method where losses are reported on Schedule A...Massachusetts will not allow these deductions creating a grossly inflated income. How does a Mass. resident resolve these conflicting laws?

[/ QUOTE ]

if it is your sole income then you likely are required to file as a self-employed individual. whether that means you must file a schedule C i don't know.

i live in MA.
the laws are not conflicting, the state of MA just does not allow you to deduct your gambling losses.

assuming no self-employed related deductions one can calculate whether is costs more to pay MA tax on gross wins (say at about 5%) without deducting losses or to pay 15% self-employment tax and 5% MA tax on the net winnnings.

so if one has winning sessions totalling $75,000 and losing sessions of $50,000, he can file a schedule C and pay 5% on 25k (MA) plus 15% of 25k (SE tax) or $5000. alternatively, by just itemizing and not deducting losses, the tax is 5% of 75k = $3750. (assuming you already itemize on your federal return)

so in this case, assuming one doesn't mind an AGI of $75,000 as opposed to $25,000 and one also doesn't take advantage of self-employed tax benefits you would pay more tax by filing a schedule C. so it depends on your particular numbers and situation. but it is your right to choose whatever (legal) reporting structure allows you to pay the least amount of tax.

[Kurn, son of Mogh]

Check the MA state instructions about filing gambling income. They may allow you to use the net amount.

[Niediam]

1. I have never seen a source which said the IRS made them file as professional even though that would certainly make sense...

2. I don't see a conflict of laws here at all. You simply are required to pay state taxes on your AGI as opposed to your net winnings.

[LinusKS]

In my opinion (I'm not a CPA), if you make a living playing poker, you should file as a pro.

As a practical matter, I doubt the IRS will hassle you, whether you file as a pro or a "recreational" gambler, as long as you file, and pay.

As to whether you'll pay more or less, run the numbers both ways, and find out. This is pretty easy to do with Tax Cut or whatever software you want to do. Or ask your tax preparer to do it.

You should consider though, that if poker is your only source of income, SE taxes are the only way to qualify for SS. (If you're already fully vested in SS, this doesn't matter so much.)

Also, any expenses you pay as a pro - including internet connection, computer equipment (bought specifically for your line of work), even your home office - if it's specifically dedicated to earning your living - can be deducted. That's not true if you're a "recreational" gambler.

If you file a Schedule C, your losses (and business expenses) will be netted out on the Schedule C. As a result, only your net winnings will be reported on your 1040. You can then go on to claim your standard deduction, if you want. This is not true if you file as a recreational gambler. In that case, you'll have to file your gross winnings, and then deduct your losses an itemized deduction. This will cost you your standard deduction, if you weren't going to itemize anyway.

[GoodOL]

Maybe 'conflicting' wasn't the right word. I understand you. However, does that seem equitable to you? Let's say you win $1,000,000 and lose $999,999 (basically a breakeven year). Do you really think the state expects you to pay taxes on $1,000,000?

[Niediam]

The state expects you to deduct that $999,999... but I'm sure they would be happy if you paid taxes on it. [img]/images/graemlins/smile.gif[/img]

[tiltaholic]

[ QUOTE ]
Maybe 'conflicting' wasn't the right word. I understand you. However, does that seem equitable to you? Let's say you win $1,000,000 and lose $999,999 (basically a breakeven year). Do you really think the state expects you to pay taxes on $1,000,000?

[/ QUOTE ]

to follow the letter of the law, yes.
gambling is a sin in MA, so you get to pay for your wins and suffer the losses like the sinner you are [img]/images/graemlins/wink.gif[/img]

tax laws are rarely "equitable"

[Niediam]

My bad. [img]/images/graemlins/smile.gif[/img]

Yes the state expect you to pay taxes on it.

If you don't like it then you shouldn't be living in that state.