The following article was written by Ann-Margaret Johnston for Poker News Daily. Visit PokerDeductions.com for more information.
I am often asked about what poker players need to know to stay out of trouble with the Internal Revenue Service (IRS). This is quite a loaded question. Without a knowledgeable person to guide you, it’s easy to slip up. Here are a few things that you should be doing if you want to play poker and stay out of the way of tax trouble.
Keep Up with What You are Doing
It is so important to keep up with wins and losses. First of all, if you plan to be any good, you’ll want to do this anyway to gauge how your game is going. The most important reason to do this is that you need to list your wins and losses on your tax return. This is not as important if you are filing as a pro player. If you are filing poker as a hobby, you have to separate them out.
Expenses are another biggie. If you absolutely, positively are not going to file as a pro, you don’t need to worry about this. As a pro, you need to keep really good records so you can offset your profits. Such expenses for online players include internet, your desk, chair, monitors, laptop, air card, etc. Live players would include hotels, taxis, entertainment and business meals (per diem if you are working out of town), cell phone, airfare, and mileage to/from the airport for gambling trips.
Other things to consider would be subscriptions to online sites for training, magazines and books that are poker-related, videos, and software that you need for poker (such as training). As a pro player, you are able to deduct 100% of your health insurance if you have a profit. This can be huge! You can also deduct 100% of what you pay a tax professional for advice and tax preparation.
Know if You Owe
So many people never know if they are supposed to pay money to the IRS with estimated taxes, or “quarterlies.” This is a bit tricky, so I will try to break it down.
Let’s say you lived at home with your parents in 2009, graduated college, dabbled in poker, and at tax time, you figured out that you do not have to file a tax return. In 2010, after your parents give you the “what are you going to do with your life” speech, you decide to go to a tournament to see how you play live. Next thing you know, you just cashed for $1,250,000 in January 2010, and, luckily, you didn’t have any backers when you won! Now, do you owe the government any of this? When do you pay it? How much do you owe? What if you lose it all by the end of the year?
Here is the rule: always look at your prior year’s tax return to see what you need to do. What you need to pay to avoid penalties is based on what your tax was in the prior year. In this case, since you didn’t file a tax return for 2009, you really don’t have to pay anything to the IRS until April 15, 2011, which is when your 2010 tax return is due. Now, you may owe a ton of money, but you can keep it all year and not give it to the IRS until April 15, 2011. But, if you are the kind of person that would blow it all, you might want to send it in – the rule is that you do not have to.
Now, in this case, you come to me and we do your taxes by April 15, 2011 based on your wins, losses, and expenses for 2010. Let’s say you end up owing $375,000 to the IRS. Well, we need to start planning for your 2011 taxes, and, like before, you look at the tax on the prior year’s return. With income this high, the rule is that you have to pay 110% of your prior year’s tax or 90% of the current year’s tax. What does this mean? If you make as much or more in 2011, you need to make quarterly estimate payments of $93,750 each.
Now, what if 2011 is a horrible year and at the time we do your taxes on April 15, you are in the hole? In this case, you don’t have to pay anything in. This would be a point where we would need to look at your situation quarterly and try to do part two of that rule, which is to pay in 90% of what we think your current year’s tax is.
Sounds confusing and it is, unfortunately. This is why, no matter who you choose, you have to have a CPA that knows what they are doing and especially understands the world of poker.
Backing Your Buddy
So, you think Johnnie is a good player and you want to stake him in a tournament. Lucky for you, Johnnie wins a huge tournament for $480,000. You get 50% of this win once Johnnie gets his cash. So, the guys come out and ask Johnnie for his Social Security Number and address. Johnnie starts to worry because he knows that he is going to fork over $240,000 to you. He tells the casino that he only wants them to give him a Form W2G for his half. They look and chuckle with a “sorry dude” and write the W2G out to Johnnie for the full amount. Now what?
This is crucial! Johnnie has to give you a Form 1099-MISC at the end of the year for any money he pays you, which means he needs your address and Social. This is the only way he can get out of paying taxes on the full amount. Remember, it’s Johnnie’s responsibility to do this form. Even if he doesn’t give it to you, you still need to claim the money as income on your return. It only hurts Johnnie if he is audited later and didn’t do the form.
Foreign Bank Account and Reporting (FBAR)
I have tried for years to get the word out on this. This is the form that you have to do if you have an online poker account, which is considered to be a foreign bank account. You are supposed to find out the highest balance on each poker site at any time during the year and then report it on the form. You are not taxed on this; it’s just the government being nosey. This form has to be sent in each year by June 15 for the previous year’s balances. You don’t have to do this form if your total across all the sites falls short of $10,000.
What if you don’t want to file this? Well, it’s a requirement and if they find out you didn’t do it and you should have, the penalties are bad. Non-willful violations are subject to fines of up to $10,000 per account and if they feel it’s a willful violation, the fee is a minimum of $100,000 per account.
Now What?
Well, these are the biggies on what a player should be doing or considering when talking taxes. Again, make sure whoever helps you knows their stuff or you will be the one that is on the hook.
Ann-Margaret Johnston is a practicing CPA in North Georgia. She is the author of the book “How to Turn Your Poker Playing Into A Business.” Her website is www.pokerdeductions.com, where you get information and e-mail her directly.
