Taxes and quitting while you're even.

[Jimbo]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
I'm no tax expert, but I think I've read posts here where some people who itemize deductions are able to deduct their gambling losses as ordinary deductions, but for some reason they don't get the full value of the deduction.


[/ QUOTE ]

You have to itemize to deduct gambling losses. By switching to itemizing, you "lose" the standard deduction. If you already itemize (think mortgage interest), you should still get the full value of the losses.

[/ QUOTE ]

True, but I think it's safe to say that a large number of 2+2ers are young single men who don't have a mortgage or other significant itemized deductions. Many people also find that their mortgage interest deductions are less than the standard deduction and take the standard anyway.

It also appears that there are other situations where your gambling losses might prevent you from getting full value from your other itemized deductions.

http://www.onlinepokerfaq.com/guide/tax-sessions.html

[/ QUOTE ]

After reading your first few posts on this subject I started to tell you that you must be high. After clicking on your link I see how you got confused. Below is the pertinet paragraph that has the incorrect information in bold:

[ QUOTE ]
The good news is you have a $10,000 net win for the year. Congratulations. The bad news is, the $130,000 you must declare in gross income is going to cost you. First of all, while you can deduct the $120,000 losses, your other deductions will be limited. For example, medical deductions are allowed only so far as they exceed 7.5% of your income, so you have just lost 7.5% of $130,000 = $9,750 in medical deductions. Even deductions like mortgage interest phase out as your income gets higher.

[/ QUOTE ]

Your link incorrectly states that your itemized gambling losses are subject to anything other than the sum total of your annual wins. See IRS Publication 529 for the correct application of gambling wins and losses.

You are correct that someone otherwise claiming the standard deduction is punished but only to the extent of the standard deduction itself, not to some addttional percentage above that deduction.

As others have mentioned in some States you are punished thusly but not on your Federal taxes nor in any State that uses the AGI from your Federal return as it's basis.

NOTE:

I am not a professional tax advisor not should you rely on my posts for your tax matters, but I am correct.

Jimbo

[Nomad84]

[ QUOTE ]
You have it totally backwards!

[/ QUOTE ]

Wow. Are you serious? Because you are completely wrong about almost everything you just said. One thing you got right is that you want your reported session wins to be as close as possible to your net winnings, by the OP's theory (and I agree). You are suggesting that you should maximize your losing sessions and minimize your winning ones. You can't really have it both ways or you end up reducing your net winnings. Obviously, your net winnings = WinningSessionTotal - LosingSessionTotal. Decreasing the first term while increasing the second only decreases the net. You pay less in taxes, but you end up with less profits too, so this is not good. The way you get NetWinnings closer to WinningSessionTotal is to reduce LosingSessionTotal as much as possible. This is what the OP was trying to say.

[ilovebadbeats]

I guess I was also right about the fact that "I totally lost it."
That's 2 things I was right about.

Thanks for the algebra - seriously. That explains more clearly...
but I still am pretty sure I have no clue what the OP was saying. I was just thinking that you want to have some (big) losing sessions to
be able to have some/add to your deductions (but I didn't realize how your Net Winnings # would go down (to directly defeat the point)...).

Anyway you do it however, it seems the Gov't f*cks you. Paying taxes on Poker winnings makes the whole job of "Pro Poker Player"
much less desirable.

We need people on here posting who have been playing as a pro for 10 years + telling us what the ins and outs are and how to squeeze money out of our tax returns...

[Cosimo]

There are two things going on here, but the result is the same in both cases.

Summary: lower AGI is better.

Case 1

If every session is very close to your average session win, then that means that your net reported income is lower. This means you get more other deductions, such as medical and mortgage. This is only relevant if you play a lot over the year. Playing only a bit at micros means that you're adding just a few thousand to your net income. If you 6-table the 10-20 for fourty hours a week, then your gross income is going to skyrocket and reducing that number is going to be very important.

Say you play 10-20, 3000-hand sessions, with a winrate of 1BB/100. You expect to win $600 per session, but your SD is 15BB/100, which works out to $1600. Let's say you alternate between winning $2200 and losing $1000. At the end of the year, you've put in 200 sessions, netting $120,000 -- 220k in net winnings and 100k in deductible losses. If you live in a state that doesn't let you deduct gambling losses, you're screwed -- you owe taxes on $220,000, not the 120 that you profited. Likewise, your Adjusted Gross Income is that 220k value, which is prolly enough to screw you out of a lot of other deductions, like mortgage and medical and whatnot. So don't have a mortgage or get sick.

If, instead, every single session was exactly your $600 win, then your AGI is exactly your real profit, you have $0 in deductions, your other deductions come into play, and therefore your total tax liability is lower.

Say you take 1000-hand sessions instead of 3000-hand sessions: at this point, your sessions are $200+-$950, or 1150 or -750. Your AGI will be $345,000 with $225k in deductions. With this much larger AGI, your other deductions count for even less, and the AMT might kick in.

I don't know cuz I'm not even close enough to this point to have to worry about it, but that's the math. If you're making a lot of money playing poker, you want a small number of very long sessions with as small a variance as possible.

Case 2

If you don't have a lot of other deductions to make -- say, you're renting, haven't had any major surgery, and don't have signifigant interest income -- then the standard deduction could save you money if it is higher than your aggregated losses.

Say you four-table 1-2 for twenty hours a week, making 2BB/100h. You report every single table as a session, at about 250 hands each. Your EV is $10 and SD $47, so let's say you alternate between winning $57 and losing $37. Your AGI is $22,800 and your deductions are 14,800. Yay for more deductions -- but now your net liability is on your total $8000 profit, meaning that you owe $835 in taxes.

Say instead you report a 4-hour session as, well, a session. With 1000 hands in a session, you average $40, SD of $95, meaning either +$135 or -$55. Your AGI at the end of the year will be $13,500 with only $5,500 in deductions, which doesn't exceed the $8000 standard deduction. Your tax liability is for the difference between 13.5 and the standard 8k deduction -- or $5,500. At 10%, that's $550 in Federal Income Tax liability. You save $285 in tax liability, or 3.5% of your total earn for the year. Since you're only making about $160 a week, you've gained about a week and a half of free winnings.

Let's say you make marathon 10-hour sessions on the weekend, instead, putting in the same hours but all together in one huge chunk. If you're behind in a session, you put in even more hours trying to get even. Obviously your AGI will fall even further, resulting in an ever lower tax liability.

Having legitimate expenses greater than the standard deduction sucks. The standard deduction is "free money" -- the government exempting some portion of your income that it grants as "you probably spent that money on a worthwhile cause, so we won't tax you for it." If you actually had greater expenses (and the income to match it), then you don't get that free credit any more.

[ddubois]

[ QUOTE ]
If every session is very close to your average session win

[/ QUOTE ]
To be a nit: This isn't the interesting mathematical qualifier. You can have wildly varying sessions, between 0 and 100000+, whatever, but if they are all positive sessions, you will experience the exact same AGI-deductions relationship you go on to describe. The "bad number" is the summation of losing sessions.

So always keep playing until you are even. [img]/images/graemlins/wink.gif[/img]