Here is my life, what are my taxes?

[Jesse Kidd]

Hello, long-time lurker, rare poster. I've read everything I can find on this subject online, and still have a number of questions. I know the proper answer is to "seek the help of a professional", but I'd really love to be able to figure this out on my own.

I started playing full-time around September of this year, after playing 8 months as a hobby. My winnings for the year are approximately $20,000 before September, and $40,000 from September through the end of the year. (Note: Before I started playing full-time, I did not keep detailed records of my play. This may make a difference in the decision.) I plan to play full-time next year, and to continue the detailed session logs I have kept since September.

I have a number of questions:

1.) I plan on filing as a recreational gambler this year, and as a professional next year(estimated around $100-$120K income). I didn't really have any other income this year, as I was travelling and basically just screwing around. Would it make sense to file as a pro this year, or to wait until next year?

2.) I plan to open an online SEP-IRA at the first of the year, and contribute heavily to it during the year. Will this be a problem? Do I need to get a business license or anything to avoid problems with the creation of a SEP-IRA, or is it no big deal?

3.) Estimated Taxes - I want to do this for income and self-employment tax for the coming year, but everything I've read seems to base off of the previous year. If I haven't done this before, what sort of numbers should I use for the quarterly payments?

4.) I largely want to file as a professional because it seems like the right thing to do. I'm not interested in being sneaky with my return or anything, although I would of course like to keep my taxes to the minimum. Will my sudden change to "professional" status be a problem as long as I can back everything up? I saw the landmark case typically cited noted that gambling needed to show a profit 3 of the last five years. I can't imagine this is a strict requirement, but has anyone had any problems with it?

Thanks a ton,

Jesse

[WSOPWinner2005]

Had this all pretyped before 2 + 2 crashed here ya go :

[ QUOTE ]
Hello, long-time lurker, rare poster. I've read everything I can find on this subject online, and still have a number of questions. I know the proper answer is to "seek the help of a professional", but I'd really love to be able to figure this out on my own.

[/ QUOTE ]

I am not trying to be an [censored] but you are making a mistake here, at the very least you should plan on spending 60 - 80 hours researching tax laws and codes PRIOR to STARTING to file your first return under your circumstances. I don't mean to be discouraging, I just tell it how it is.

[ QUOTE ]

I started playing full-time around September of this year, after playing 8 months as a hobby. My winnings for the year are approximately $20,000 before September, and $40,000 from September through the end of the year. (Note: Before I started playing full-time, I did not keep detailed records of my play. This may make a difference in the decision.) I plan to play full-time next year, and to continue the detailed session logs I have kept since September.


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Without detailed logs u may as well claim that portion of your winnings as recreational plain and simple with a change of profession effective September.

I hope you realize you are getting into a rather conflicting situation on whose views are what as far as how to file as a professional gambler. And the best advice I can give you is not to listen to someone you meet off a message board but to hire a professional who specializes in this arena.

Some suggestions (although I haven't done these)

Call the Bellagio state you just won $250,000 playing on-line poker and want to play there but only want to take $150,000 to their casino. You would like to know if they can refer you to any attorneys that handle tax matters.

There are alot of other ways, be inventive and find yourself a good ACCOUNTANT - [censored] CPA'S!!!

[ QUOTE ]

I have a number of questions:

1.) I plan on filing as a recreational gambler this year, and as a professional next year(estimated around $100-$120K income). I didn't really have any other income this year, as I was travelling and basically just screwing around. Would it make sense to file as a pro this year, or to wait until next year?


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You should file partially as a pro this year since you didn't maintain the proper records. From the point you have records on you played professionally, prior you played as an amateur.


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2.) I plan to open an online SEP-IRA at the first of the year, and contribute heavily to it during the year. Will this be a problem? Do I need to get a business license or anything to avoid problems with the creation of a SEP-IRA, or is it no big deal?


[/ QUOTE ]

By establishing an S-Corporation (I can't remember the legalities of it, I was allowed to contribute $30,000.00 per year to a combination of retirement plans. This is something to consult an accountant on as I believe it has to do with the amount of "TAXABLE" income I had that year. But yes, done properly, you can do this and it is a smart move especially since I am guessing you are fairly young.

[ QUOTE ]

3.) Estimated Taxes - I want to do this for income and self-employment tax for the coming year, but everything I've read seems to base off of the previous year. If I haven't done this before, what sort of numbers should I use for the quarterly payments?


[/ QUOTE ]

The IRS looks at this rather simply. If you pay as much in quarterly payments as

A) Your actual income is
B) 1/4th your total payments made the prior year

Per Quarter you are in the clear. It doesn't matter if u go from making 30K a year to 750K a year you ONLY have to make estimated with holding payments to the IRS based on the prior tax year.

However the following year you will have o base on the 750K and if you go below expect some minro issues from the IRS if the difference is huge, normally they will not say a word till you file the end of year return however.

[ QUOTE ]

4.) I largely want to file as a professional because it seems like the right thing to do. I'm not interested in being sneaky with my return or anything, although I would of course like to keep my taxes to the minimum. Will my sudden change to "professional" status be a problem as long as I can back everything up? I saw the landmark case typically cited noted that gambling needed to show a profit 3 of the last five years. I can't imagine this is a strict requirement, but has anyone had any problems with it?


[/ QUOTE ]

Many others are going to tell you this, the IRS wants your tax dollars. They don't delve into the legality of what you are doing period. This is kind of pushing it but did you know you can buy Marijuana tax stamps in states where marijuana is 100% illegal (even medical license)?

Therefore you could be charged with not only posession, but for not having the proper tax stamps if they really wanted to lol ... This is how the IRS works in a gist.

The main problem you will have, and it is a HUGE HUGE HUGE red flag, is claiming a portion of your home rent/mortgage, electricity, water, etc... as a business deduction. Don't do this for a few years and you will be O.K.

Also don't try to deduct the new $1,500 suit you had to have to play ina tourney, you get audited the IRS does not like that [censored]... TRUST ME.

[ QUOTE ]

Thanks a ton,

Jesse

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[broiler]

Jesse

My first suggestion to you is to treat your income as honestly as possible. Your situation is made more difficult by your lack of records for the first part of the year. You truly become a professional when you treat your situation like a business.

To answer your questions:
1)Filing as a pro would make your life easier if you were to get audited. Since a pro is allowed to net wins and losses, there would be no change from the auditor. The problem is that you actually are part year hobby and part year pro. Some IRS auditors would give you some leeway for honesty, others would not and it really depends on who you get. The downside is 15.3% self employment tax on professional winnings.

2)The SEP would not be a problem since you will have a business (Schedule C) that will be used as your income base. The SEP really is that simple. There is a one page form filed with the IRS to notify them that a plan was formed and the % of income that you will contribute to the plan. All you have to watch is the maximum contribution % and the contribution $ maximum for the year ($41,000 for 2004). I would guess that the number will be 42k for next year. There is a real simple formula to calculate your contribution for any year. A SEP has no annual filing requirements, so it really is a cheap way to set up a retirement plan.

3)The estimated tax question is difficult because most answers deal with avoiding underpayment penalties. If you want to owe zero with your tax return for 2005, then that is a different situation. Avoiding penalties is easiest to manage using the prior year exceptions. The SE tax is 15.3% up to the FICA limit and then 2.9% past that number. I believe the FICA limit is between 91k an 93k for 2005. I apologize for not having the exact number since I am at home and the IRS website freezes my home computer 95% of the time. To take care of the income tax, I would just get a copy of the 2005 tax tables, annualize the income on a quarterly basis, and pay in the % of tax for the number of quarters you have passed in the year. You might owe a little at the end of the year, but it shouldn't be a large amount if you are close on your estimations.

4)Your records are the best proof you have against the IRS. The IRS must disproove your records before they can use any of their methods to determine your income. The greater the detail, the harded it is to lose in court. A 3 of 5 year test only matters if you will be unable to pass the test. You don't have to wait 2 years to pass and then start filing as a professional. If you never have a losing year, there will never be a question that you are a pro player.

I hope this was able to clarify some of your questions.