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Three Questions Every Gambler Should Ask Before Filing Their Income Tax Return
If you take home casino winnings or money from private card games, federal tax laws require you to report it as income. For the majority of gamers, this is considered hobby income, which means that not all gambling expenses can be deducted. But, when you qualify as a professional gambler, you can deduct all of your gambling expenses and losses, just like other professionals. Here’s what you need to know:
1 – Are my earnings business income?
One or two winning pots won at the casino or at poker games with your friends does not make you a professional player. A professional gambler runs a business, not just to win a game or two. During an audit, the professional player will have to prove that his gambling activities are considered a business.
The IRS has classified gambling as a hobby because most people gamble for fun. This is why gambling winnings are usually included with other miscellaneous income. This is bad because even though every penny of gambling income must be claimed, the amateur gambler cannot deduct all of the expenses involved in generating that income. A professional gambler, however, can take full advantage of corporate tax laws that allow self-employed individuals to deduct all qualifying losses and expenses.
Tracking wins, losses, and expenses is the same for the amateur and professional gambler, and it must be done according to IRS rules if you want to survive a tax audit. Failure to do so may disqualify such expenses and losses. To escape the classification of a hobby, a player must be prepared to demonstrate that he is committed to making “genuine and honest” efforts to produce a profit. The desire to win big is not enough.
2 – Can I prove that gambling is my business?
Documenting your gambling in a professional manner is an essential part of proving to the IRS that you are not a recreational gambler. Professional gamblers should keep a log of all gambling activity. This should include the date and location of each event, your starting bank, your closing bank, and net wins or losses.
All expenses incurred to travel to each gaming event, as well as hotel costs, entrance fees, meals, tips and private coaching must also be documented if you want to survive an audit. If the casino “comps” your expenses are not deductible; only expenses paid by you personally are deductible.
3 – Do I have to pay self-employment tax on my earnings?
There is no self-employment tax on gambling earnings; however, there is a self-employment tax on most business profits.
Self-employment taxes fund your personal Medicare and Social Security accounts. When you are employed by someone else, your employer pays half of these taxes and you pay the other half. The freelancer pays for everything. However, many times most of this tax can be avoided by funding a private retirement account set up for your business.
In other words, whether or not you pay self-employment taxes actually depends on your knowledge of current small business tax laws. Working with a qualified tax accountant, recommended by other players, is the best way to reduce your self-employment tax.
If you think you qualify as a professional gambler, you should not prepare your own tax return. Because an audit is highly possible in this industry, you will want the advice of a qualified tax accountant when dealing with the IRS.
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