As gambling in general and poker in particular spread across the land, here's some advice for neophyte players: Not only do you gotta know when to hold 'em, know when to fold 'em, you gotta know how to put it all on your tax return.
Gambling winnings, as most people know, are taxable income. But gambling losses, as many people don't know, aren't necessarily deductible. And the widely held assumption that you simply subtract your losses from your winnings and report only the net income, if any, is not the way it works.
In fact, the taxation of gambling -- or "gaming," as the Internal Revenue Service calls it -- is structured in an unusual "heads the government wins, tails the taxpayer loses" way. And because of that, a person who loses as much as he wins can sometimes end up owing higher taxes.
One of the few things going in the gambler's favor, at least until recently, is the difficulty the IRS has in tracking that income. Now the agency wants to change that.
"It's time to take a look at poker, which has become very, very popular, and see what sort of guidance we need to be starting here," IRS Chief Counsel Donald L. Korb said Friday.
The first step, he said, will be to work out an improved system of withholding rules covering poker tournaments, and later on, perhaps broadening its reach.
Right now, the agency's reporting rules are not designed with poker in mind.
In general, IRS rules specify that the payer of your gambling winnings must send you a Form W-2G only if you win $600 ($1,200 from bingo and slot machines, and $1,500 from keno) or more and your winnings are at least 300 times the amount of the wager. In addition, if you win more than $5,000, the payer may be required to withhold 25 percent of the total -- and if you don't give your Social Security number to the payer, withholding is 28 percent. The IRS needs to decide, among other things, where poker tournaments fit in this scheme.
The current rules work well for horse racing, lotteries and similar high-payoff games, but "I can't imagine an instance where you would get [a W-2G] from poker," said Jeffrey Kelson, tax partner at the accounting firm BDO Seidman LLP in New York.
But just because the payer doesn't report the income doesn't mean the gambler doesn't have to, Kelson cautioned. He said he has found the IRS increasingly doing "root canal" audits in which the taxpayer is required to account for every bank deposit. These and other tactics can enable the IRS "to stumble over your gambling winnings," he said.
So, if you win and want to avoid trouble, you'd better include the money on your return.
In 2002, the most recent year for which figures are available, 1.5 million taxpayers reported total winnings of $18.7 billion, while 906,000 taxpayers reported $11.8 billion in losses.
IRS rules require you to report both -- not the net after subtracting your losses or other costs, but all of it. You put the winnings on a specific line on the front of Form 1040 -- it was line 21, "other income," for 2004 returns, though forms may change from year to year -- and that results in your total winnings being included in your gross income, and ultimately your adjusted gross income.
You enter your losses separately as a miscellaneous deduction on Schedule A.
This arrangement has several unhappy consequences for taxpayers.
First, if you don't itemize deductions, you pay tax on all the winnings and get no offsetting write-off from your losses. This can hurt students and other relatively low-income people who would normally take the standard deduction.
Second, if you do itemize, you can deduct losses or other costs only up to your winnings. If you lost more than you won, you get no tax help with those extra losses. You can write off associated costs, such as admission to gambling establishments, food, lodging and the like, but they are subject to the same limit.
In fact, various complimentary items, such as meals and lodging, that a gambler receives "to induce him to gamble" may be considered income, the IRS says.
Third, even if you do itemize and even if you have enough losses to wipe out the tax on your winnings, those winnings may still serve to inflate your adjusted gross income because the winnings get added in early in your calculations but the losses do not get figured in until later.
A higher AGI can trigger various phaseouts and limitations that hurt your bottom line. For example, thresholds for taxation of Social Security benefits are based on AGI. So are limits on eligibility for deductible IRA contributions or contributions to a Roth IRA.
In addition, at an AGI of about $145,000 itemized deductions begin to phase out. Gambling losses are exempt from this phaseout, but winnings, by pushing AGI higher, can cause the phaseout of other deductions, boosting taxable income.
Finally, gambling losses are subject to IRS challenge, just as any deduction is. And while the payer may report your winnings, it is not likely to report your losses. So it's up to you to keep good records.
The IRS recommends you keep a log, with dates, amounts and locations noted. But the log alone won't do it. You should also hang onto receipts, tickets and any other papers that would back up your log.
That may be a hassle, but it's worth it. The tax treatment of gambling is tough enough. Don't get your legitimate deductions disallowed for lack of records.
The Internal Revenue Service is reminding teachers and other educators to save their receipts when they buy books or other classroom supplies. Up to $250 of such expenses is deductible from this year's taxes. And the deduction is available whether or not the taxpayer itemizes deductions on Schedule A.
The deduction is available to educators in public or private elementary or secondary schools. To be eligible, a person must work at least 900 hours during the school year as a teacher, instructor, counselor, principal or aide.