Tax question: recreational vs. professional

[Senor Choppy]

Because the end of the year is approaching, a friend and I have been discussing how to go about declaring gambling income for 2003. I would like to pick a method for declaring gambling income and stick with it for future years. I've done a bit of reading on the subject but have yet to consult an accountant. Here are the advantages/disadvantages as I understand them:

Declaring gambling winnings as other income. Pros: You avoid the complications of filing as a business. You don't pay self-employment tax. Cons: If you don't own a house, (which means you're probably taking the standard deduction), you're losing over $6k in losses that you can declare, and so end up paying over $1k in taxes that you wouldn't have otherwise even if you broke even for the year. You don't get any of the deductions a business would, like writing off travel expenses, computer equipment, etc.

Filing as a professional. Pros: Gives you the ability to write off a variety of expenses lowering your tax burden and will immediately net you $1-$2k if you were going to take the standard deduction. Cons: The self-employment tax of 15.2% for sole-proprietors almost doubles the taxes you pay if you're showing a profit for the year. Also it's a lot more complicated than just showing gambling winnings as other income.

The one thing I don't know a lot about is incorporating to avoid the self-employment tax. My friend's accountant suggested this but has always seemed like a lot more work than filing the necessary forms to start a business as a sole proprietor. If anyone has experience doing this, I'd love to hear about it.

One last thing. If I have no other job besides playing poker, I'm playing everyday, and I'm making 50k a year doing it, does the IRS see this as clearly someone that should be filing as a professional and see filing recreationally as something dishonest or could I continue to file with gambling winnings listed as other income for the next 50 years without this being a problem even if audited? It seems like the simplest and cheapest way to file for internet players, but doesn't seem accurate. I've read about people going out of their way to prove they were professionals but not the other way around. Because of the lack of loopholes that come with filing as a business, is this just a form of filing welcomed by the IRS even though it isn't as descriptive?

Would love to hear any and all comments about this so I can make a decision before January.

[UMCorona]

I don't have any answers for you, but I do have question regarding something along the same vein that you're post is about. Maybe someone can answer your questions and mine at the same time.

Say you do decide to call yourself a business as far as taxes are concerned, could you write off something like a tournament entry fee as a business expense? I assume not, but it would sort of make sense, considering some of the other things that a "normal" business can write off.

What about airfare? If I'm a professional poker player and I fly to Vegas to play can I call that a travel expense?

UMCorona

[PuffsNutz]

In the end, I think filing as pro is better..If
for nothing else your contribution to Soc Sec is
returned to you in the end.

Also the way I figured it this yr, someone claiming
around 65K plays close to the same either way.
(I can deduct family medical, and a few other deductions the
business method)...So its either pay around 12K to
state and federal (other income) or pay around 3-4K
to state and federal and 8-9K SE tax (rough estimates).

Also dont forget that you can contribute something
like 25% of your net income to a SEP tax deferred
retirement plan..Something I plan on doing next yr.


What Im interested to know is if any internet players
have actually deducted home office space/electricty,
internet bills, etc..(like a typical home based
business would).

Also concerning estimated taxes..This yr will be my
first filing as pro, so for this yr I have
paid 0 in estimated taxes...Should I start for quarter
3? (due dec 31), or should I just forget about
Estimated taxes and wait till APR to lump it all together?

Technically I dont think you have to file EST taxes
in your first yr, if the prev year you paid no taxes..
But I hate to do anything suspicious to raise any
audit red flags, etc.

One last question from me..As far as a diary goes,
must it be handwritten? or is a program like
statking good enough (internet play).

Anybody? Thanks.

[Cyndie]

The rule is that if the goal of the trip is to profit, it is a business expense for a professional. You do not need to make a profit from every tournament or trip, but if you do not pass the "hobby" test of making a profit within three years for sure your deductions would be allowed.

The pros and cons of professional gambler are as you have described them. If you have other jobs that pay your social security taxes too...I believe there still is an annual cap on the amount you pay for social security taxes, but I do not know the rule about who pays them first, YOU or your w2 employer. Good question!

If you are in a lower income bracket ...the Roth IRA can be useful too, since the income you put in it has taxes paid now, but not on withdrawal.

Check with a professional gambling attorney. There is one in CardPlayer and the one mentioned here has also written in CPM www.rbstaxes.com He is very knowledgeable and not expensive.

[Wake up CALL]

"I believe there still is an annual cap on the amount you pay for social security taxes, but I do not know the rule about who pays them first, YOU or your w2 employer. Good question!"

It doesn't matter who pays them first, if you overpay you file for the refund. After you have paid 6.2% on your first $87,000 of earnings for 2003 ($87,900 in 2004) you have met the cap on the OASDI tax. You will still owe the 1.45% medicare tax (HI) on your earned income no matter how high it goes.

An example: you earned $100,000 in 2003 all earned income. You pay $6655.50 in combined OASDI and HI tax for the first $87,000. on the next $13,000 you will pay $188.50 in HI tax only. This is of course in addition to state and federal income taxes.