Front Page of the Jacksonville Paper Yesterday

[Kurn]

[quote=Talking Poker]I don't believe this is true, barring some crazy example where the person wins $5 or something and owes more than that in taxes. Please elaborate, and feel free to start a new thread if you like, since I doubt this was discussed in Reel Deal's paper the other day.

QUOTE]

here's the example. let's call him Joe.

Joe has a job, but plays poker for a 2nd income. During year X, Joe has a tough year, but ekes out a $3,000 profit from poker, based on $25,000 in winning sessions and $22,000 in losing sessions. Since IRS publication 529 specifically forbids reporting your net as gambling income, Joe follows the law and reorts $25,000 as *other income* on form 1040.

Let's now assume that Joe is a renter, thus he does not itemize deductions on his tax return, taking instead, the $6,600 standard deduction for a single guy. let's also just consider Joe's marginal income from poker, but, for sake of discussion, we'll assume Joe makes $40K per year from his day job. let's also assume that Joe contacts a tax accountant who is familiar with IRS practices who advises Joe, that the IRS will likely deny him the right to treat his poker income as self-employment income, so he can't uses schedule C*

So, now, Joe uses schedule A so he can deduct his $22,000 in losses. However, he is only getting to use $15,400 in losses since the rest makes up for his lost standard deuction.

That makes Joe's marginal net income from poker for tax purposes $9,600. At his income level, these marginal dollars will be taxed at about 30%, making his marginal tax liability $2,880. Now, let's assume Joe is a resident of the Commonwealth of Massachusetts. The Mass DOR does not allow netting, nor does it allow deduction of losses. Now Joe, on his State return, must pay 5.75% on the full $25,000 of winning sessions, or $$1,437.50 for a total marginal tax bill of $4,317.50 on his $3,000 of net poker income.

Contrived example, sure. But it is possible.

* - With respect to treating gambling income as self-employment. The IRS has repeatedly taken a stand that to file as a "professional" gambling must either be your primary source of income or you must demonstrate at least 3-years of prior profitability to demonstrate an expectation of profit. At least one taxpayer has challanged this and won the case, but the IRS has not changed its policy as far as I know.

[Penguinfan]

Actually TP, I was just kinda rambling there, looking for an obscure example that might be able to happen but probably wouldn't.

For the record I have claimed horse winnings two years in a row and have not paid more in taxes than I won, I too doubt it could happen that way.

[Kurn]

See my straw man above. In short, for that to happen, you'd have to have a marginally profitable year but have played a great deal, not normally itemize deductions on Federal, *and* live in a State that has a State income tax.

[Talking Poker]

Contrived, yes, but a perfectly legitimate example. This is exactly how people can get "screwed." My problem with this logic is how you (and everyone else) are looking at the "standard deduction." I'm convinced 90% of the public has no idea what this is for, or why the get it, and so on. The whole purpose of the standard decuction is to prevent Joe Blow (no relation to Joe) from having to itemize every little thing all year long. If you have MORE than $6000 in deductions, as Joe does, you itemize them. If you don't, you just take the standard deduction and be done with it.

Let's say for example you pay $6050 in morgage interest in a year, you give nothing to charity, you don't play poker, etc. That is your ONLY deduction. Well, you get to write off that entire $6050. It FEELS like you are only writing off an extra $50, and in reality you are, but you are still getting to claim the entire $6050. Looking at it as though you would have gotten to write off $6000 anyway, so you should be renting instead of owning (or drawing other unrelated conclusions) is just silly.

Also, back to Joe's example for a minute. As you said, he lives in Mass and they have stupid tax laws. Well, that's fine, but you can't use that in this example. Joe has the CHOICE to live in another state, like Florida, where there is no income tax. So you can't blame that on the IRS.

But back to the point - yes, you can make a case and manipulate the numbers like above, but for the most part, it's not THAT bad. My off the record advice to Joe and his $3000 in poker winnings: Don't even report it. Illegal, yes. But realistically, unless he's an idiot about it, there is no reason the IRS should ever know he even PLAYED poker last year.