Deducting Hobby Expenses

[ubercuber]

Setup:

2005 is first year as poker player/sports bettor
had about $2700 winnings
had about $2500 losses

about $1500 bonuses

claimed:
winnings as gambling income
itemized losses (improved on standard deduction)
bonuses as other income/ gambling comps
itemized under hobby expenses: (the point of the post, finally)
All poker books, poker tracker software to the tune of $175.00

I am using tax cut and the explanation seems like this is legit, but I have yet to hear of anybody doing this so I thought I better check with experts here before I get myself into trouble.

[AAAA]

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itemized losses (improved on standard deduction)

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if by this you mean you added your losses to the standard deduction, try again. The losses you mentioned do not increase your standard deduction. In fact they are not enough to give you any benefit at all.

You just get the standard deduction so that in effect, you are paying on your entire $2700 and $1500 and do not get to deduct any of your losses.

This is why there is so much moaning on the whole topic.

The good news is that you might be able to deduct some of your books off your winnings without having to put them in the Schedule A where you would put your losses. I am not positive, but i think you might also be able to deduct some tourney entry fees off your gross wins.

[ubercuber]

No I mean that by itemizing all my duductions, including Mortgage interest, gambling losses, etc... my total deductions were higher than if were to just take the standard deduction. Last year itemizing left me about $100 short of the SD so I kinda thought this would work out this way.

[AAAA]

that is fine...just didn't want you to get hit with the double whammy, and find that your losses weren't getting you any credit.

The way the laws are written it is definitely important for a player to own a home.

[Holden97]

How is owning a home better? If you deduct depreciation for a home you own, you pay tax on that when you later sell it. If you deduct a portion of rent, there is no future tax liability related to those current deductions.

In general, tax rules are more favorable for homeowners. When analyzing deductions for home-based business, I think it is too broad of a generalization to say being a homeowner is favorable.

[ubercuber]

[ QUOTE ]
How is owning a home better? If you deduct depreciation for a home you own, you pay tax on that when you later sell it. If you deduct a portion of rent, there is no future tax liability related to those current deductions.

In general, tax rules are more favorable for homeowners. When analyzing deductions for home-based business, I think it is too broad of a generalization to say being a homeowner is favorable.

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Owning a home is beneficial because it increases the liklihood that itemizing will exceed the standard deduction (because mortgage interest is pretty close if not enough to put you over by itself). If you are using the standard deduction you don't get to factor your losses unless you file schedule C as a pro.

It is even more beneficial to make gobs of money so this is not even as issue, but I think this is a common dilema for part time, but pretty active players, and making gobs of money probably has it's own issues...ask me next year. [img]/images/graemlins/cool.gif[/img]

[ubercuber]

[ QUOTE ]
The good news is that you might be able to deduct some of your books off your winnings without having to put them in the Schedule A where you would put your losses. I am not positive, but i think you might also be able to deduct some tourney entry fees off your gross wins.

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It turns out that the hobby expense doesn't affect my bottom line anyway, so how do I go about doing what you suggest, and can anybody confirm the info?

[Holden97]

[ QUOTE ]
[ QUOTE ]
How is owning a home better? If you deduct depreciation for a home you own, you pay tax on that when you later sell it. If you deduct a portion of rent, there is no future tax liability related to those current deductions.

In general, tax rules are more favorable for homeowners. When analyzing deductions for home-based business, I think it is too broad of a generalization to say being a homeowner is favorable.

[/ QUOTE ]

Owning a home is beneficial because it increases the liklihood that itemizing will exceed the standard deduction (because mortgage interest is pretty close if not enough to put you over by itself). If you are using the standard deduction you don't get to factor your losses unless you file schedule C as a pro.

It is even more beneficial to make gobs of money so this is not even as issue, but I think this is a common dilema for part time, but pretty active players, and making gobs of money probably has it's own issues...ask me next year. [img]/images/graemlins/cool.gif[/img]

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I think you've illustrated my point well, but I don't have time right now to fully explain why. In general, if you are itemizing, then you aren't getting free deductions from the government (the standard deduction). I also pointed out that that you can't make generalizations in this area; you've identified one very specific fact pattern that in a high-level analysis (I'd be curious how the #'s actually work out) home ownership is better than renting.

[AAAA]

well, there are times when a person shouldn't buy a house, unless they are comfortable being a landlord.

Buying a condo or townhome with restrictions on renting the property are not wise for people who may want or need to move in a relatively short time can be unwise.

Buying when prices have already risen rapidly may not be a wise time to buy.

Paying too much for a home or spending too much on a home and not being able to recapture are usually not good ideas. An example of this can be adding space to a home in a lower cost neighborhood. However, adding a 2 car garage sized building to a property can be very beneficial if you host a legal poker game there and make a lot of money from the game, or get lots of referrals for online games from the game.

Actually, if you have any kind of skills in the carpentry area, building a home and living in it for two years is probably the biggest benefit of all times, but that is a separate issue. $250,000 tax free is nothing to sneeze at!

But the biggest benefit is the home mortgage deductibility sets you up to be able to deduct all your losses. A side benefit for gamblers is that home equity is not quite so ripe for spending as some other cash type assets.Although second mortages have made this too easy in some ways!

[Holden97]

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$250,000 tax free is nothing to sneeze at!

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Keep in mind that you can only use the $250K to shelter the gain from a sale of a personal residence. After you consider 75% of your house to be business property, that portion of a house is no longer a personal residence, so gain from that portion of the house is not tax free.

I suppose you can look at the deductions as "setting" one up to deduct losses; this is only true if you are not undertaking poker or, in your case, the affiliate business as a professional. If the taxpayer is making this a profession, the mortgage deduction doesn't set up the taxpayer for any additional deductions, rather there is probably the loss of the standard deduction, which is a free deduction with no economic cost - you are out of pocket for mortgage interest.