I’m often asked about what poker players need to know to stay out of trouble with the IRS. This is a loaded question; there are several basic things all poker players should know and things they should be doing they don’t realize. Here are a few things you should be doing if you want to play poker and stay out of the way of tax trouble.
KEEP UP WITH WHAT YOU’RE DOING: It’s so important to keep up with wins and losses. First, if you plan to be any good, you want to do this anyway to gauge how your game is going. The biggest reason to do this is you need to list your wins and losses on your tax return. This doesn’t matter as much if you’re filing as a pro player. If you’re filing poker as a hobby, you have to separate them.
Expenses are another biggie. If you absolutely 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’re working out of town), cell phone, airfare and mileage to/from the airport for gambling trips or to casinos. 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 percent of your health insurance if you have a profit. This can be HUGE! You also can deduct 100 percent 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 you don’t 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 who would blow it all, you might want to send it in. The rule is you do not have to at that time.
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 you have to pay in 110 percent of your prior year’s tax OR 90 percent 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. This would be a point where we would need to look at your situation quarterly and try to do Part 2 of that rule, which is to pay in 90 percent 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’re doing and especially that understands the world of poker.
BACKING YOUR BUDDY: So, you think Johnny is a good player and you want to stake him in a tournament. Lucky for you, Johnny wins a huge tournament for $480,000. You get 50 percent of this win once Johnny gets his cash. So, the guys come out and ask Johnny for his Social Security number and address. Johnny starts to worry because he knows he’s going to fork over $240K to you. He tells the casino he only wants them to give him a Form W-2G for his half. They look and chuckle with a “sorry dude,” and they write the W-2G out to Johnny for the full amount. Now what?
This is crucial! Johnny has to give you a Form 1099-MISC at the end of the year for any money he pays you, and this amount should go in Box 3 as Other Income. So, for him to give you this form, he needs your information, such as your full name, address and Social Security number. This is best done on a Form W-9, which you can find at www.irs.gov. Even if your backer is not a U.S. citizen, get this form filled out, as your CPA has to do another form called 1042-S, which I’m not even going to try to explain here.
You really need to be goofy and carry this Form W-9 around if you have backers. Giving you this form is the only way Johnny can get out of paying taxes on the full amount. Remember, it’s Johnny’s responsibility to do this form. Even if Johnny doesn’t give you the form, you still need to claim the money as income on your return. It only hurts Johnny if he’s audited later and didn’t get you to fill out the W-9 for him.
FOREIGN BANK ACCOUNT AND REPORTING: I have tried for years to get the word out on this. This is the form 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 totals from all the sites don’t exceed $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 $10,000 per account and if they feel it’s a willful violation, the fee is a minimum of $100,000 per account. So, how lucky are you feeling by not filing this one?
NOW WHAT? Well, these are some of 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 How to Turn Your Poker Playing Into A Business. You can find answers to commonly asked poker tax questions on her website at pokerdeductions.com.