[quote=Talking Poker]I don't believe this is true, barring some crazy example where the person wins $5 or something and owes more than that in taxes. Please elaborate, and feel free to start a new thread if you like, since I doubt this was discussed in Reel Deal's paper the other day.
QUOTE]
here's the example. let's call him Joe.
Joe has a job, but plays poker for a 2nd income. During year X, Joe has a tough year, but ekes out a $3,000 profit from poker, based on $25,000 in winning sessions and $22,000 in losing sessions. Since IRS publication 529 specifically forbids reporting your net as gambling income, Joe follows the law and reorts $25,000 as *other income* on form 1040.
Let's now assume that Joe is a renter, thus he does not itemize deductions on his tax return, taking instead, the $6,600 standard deduction for a single guy. let's also just consider Joe's marginal income from poker, but, for sake of discussion, we'll assume Joe makes $40K per year from his day job. let's also assume that Joe contacts a tax accountant who is familiar with IRS practices who advises Joe, that the IRS will likely deny him the right to treat his poker income as self-employment income, so he can't uses schedule C*
So, now, Joe uses schedule A so he can deduct his $22,000 in losses. However, he is only getting to use $15,400 in losses since the rest makes up for his lost standard deuction.
That makes Joe's marginal net income from poker for tax purposes $9,600. At his income level, these marginal dollars will be taxed at about 30%, making his marginal tax liability $2,880. Now, let's assume Joe is a resident of the Commonwealth of Massachusetts. The Mass DOR does not allow netting, nor does it allow deduction of losses. Now Joe, on his State return, must pay 5.75% on the full $25,000 of winning sessions, or $$1,437.50 for a total marginal tax bill of $4,317.50 on his $3,000 of net poker income.
Contrived example, sure. But it is possible.
* - With respect to treating gambling income as self-employment. The IRS has repeatedly taken a stand that to file as a "professional" gambling must either be your primary source of income or you must demonstrate at least 3-years of prior profitability to demonstrate an expectation of profit. At least one taxpayer has challanged this and won the case, but the IRS has not changed its policy as far as I know.