Taxable Talk

New Hampshire Gambling Tax Now Law

New Hampshire's budget was signed into law earlier this week, and it gives gamblers a reason to frown. Included in the budget is a 10% tax on gambling winnings.

This article on the tax states,

As written, he [Rick Newman, a lobbyist for The Lodge at Belmont, a horse racing track] said the tax is imposed on winnings that are subject to Internal Revenue Service withholding and that "the triggering amount" in most cases is $5,000.

"However, under Federal law it can be as low as $600 in the case of a winner who does not provide a tax identification number. If someone wins $4,999.00 and provides a tax identification number they would not be subject to IRS withholding and therefore would not be subject to the NH tax. However if someone were to win that same $4,999.00 and did not provide a tax identification number that person would become subject to IRS withholding and because of that would be subject to the NH tax."

An attorney, who is from New Hampshire, wrote on the Poker Players Alliance forum that the new tax applies only to gambling income subject to reporting on a Form W-2G.

There are three problems with this analysis. First, New Hampshire might attempt to assess the tax on the net income of a professional gambler (arguing a different interpretation of the law) or on the gross income of an amateur gambler. Second, what about income that, if earned in the United States would be subject to reporting on a W-2G but because it's earned online is not? Joe Taxpayer wins an online poker tournament for $22,000. If he had won it in a brick and mortar casino, he'd receive a W-2G. However, he won it online so he doesn't. New Hampshire could impose a 10% tax on Mr. Taxpayer. It's unclear whether the law applies or not. Fighting the government is expensive and it's easier to avoid the fight than to have the fight.

Finally, there's a slippery slope to deal with. New Hampshire now has this tax. While it's projected to bring in $13 million or so, it won't. Taxes never bring in what they're projected to because people modify their behavior to avoid the tax. When (not if) this occurs, what's to stop New Hampshire legislators from changing the definition so that all gambling income is explicitly taxable?

My advice to New Hampshire gamblers is simple. It's time to consider relocating.

Related Posts (on one page):

New Hampshire Gambling Tax Now Law
New Hampshire Gambling Tax Moving Forward
New Hampshire Gambling Tax Not Yet Law
New Hampshire Adds Gambling Tax

Posted by Russ on Thursday July 2, 2009 at 3:08pm. 0 Comments 0 Trackbacks

IRS Gives More Time for FBAR for Some

The reporting of Foreign Bank and Financial Accounts—the FBAR reporting on Form TD F 90-22.1—is impacting more individuals than in the past. More people have foreign financial accounts, and online gambling accounts are now considered foreign financial accounts. As Joe Kristan pointed out yesterday, the IRS has granted an extension to individuals who need to file this form.

That said, it's not that simple to take advantage of this extension. You will have needed to have already filed and paid your 2008 taxes. You must attach an explanation to the TD F 90-22.1 that you file with the Detroit computing center. The IRS notes:

Taxpayers who reported and paid tax on all their 2008 taxable income but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, should file the delinquent FBAR report according to the instructions and attach a statement explaining why the report is filed late.

Send a copy of the delinquent FBAR, together with a copy of the 2008 tax return, by September 23, 2009, to the Philadelphia Offshore Identification Unit, at the following address:

Internal Revenue Service
11501 Roosevelt Blvd.
South Bldg., Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge, Offshore Unit, DP S-611

In this situation, the IRS will not impose a penalty for the failure to file the FBAR.

Additionally, if all 2008 taxable income with respect to a foreign financial account is timely reported and a United States person only recently learned they have a 2008 FBAR obligation and there is insufficient time to gather the necessary information to complete the FBAR, the United States person may follow the procedures set forth above and no penalty will be imposed.

For 2008 tax returns due after September 23, 2009, the tax return does not need to accompany the 2008 FBAR.

Why September 23rd? That's the deadline for the current IRS "amnesty" on foreign financial accounts. In previous years just submitting the FBAR late and attaching an explanation sufficed. This year, the IRS is getting tougher on delinquent FBAR filers.

There's a warning that's definitely implied in the IRS notice. If you don't file a FBAR by September 23rd and you should have, it's possible the IRS won't be willing to waive the penalties. The penalties are severe. For willful failure to file, the penalty is the greater of $100,000 or half the balance in the account.

If you can, file the FBAR today. If you can't, file it when you can (but on or before September 23rd) and remember to follow the procedure detailed above. And do spend the $5.10 on mailing it using certified mail, return receipt requested.

Posted by Russ on Tuesday June 30, 2009 at 2:42pm. 0 Comments 0 Trackbacks

Foreign Financial Account Reporting Due

If you have a foreign financial account, or have signature authority over such an account, you must file Form TD F 90-22.1. That form is due on June 30th. Unlike every other IRS deadline, this one is a receipt deadline. That means you should put your TD F 90-22.1 in the mail today.

Who needs to file? If you take the sum of the maximum balance of your foreign account(s) and it adds up to $10,000 or more, you must file. Foreign accounts include the obvious (bank accounts, credit cards, etc.) and some less obvious accounts such as online gambling accounts. If you're an accounts payable clerk and you sign the checks for a corporate foreign bank account, you must file the form.

The penalties are extremely steep for not filing. Non-willful violations start at $10,000; willful violations are the greater of half the balance in the account or $100,000. You can also go to ClubFed for this.

And don't forget to spend $5.10 at the post office to mail the form using certified mail, return receipt requested. It's your proof of timely filing.

Posted by Russ on Wednesday June 24, 2009 at 6:07am. 0 Comments 0 Trackbacks

New Hampshire Gambling Tax Moving Forward

It appears likely, but not certain, that New Hampshire will soon have a 10% tax on gambling winnings. The state legislature tentatively approved a new budget that contains the tax. It still must be approved by each house of the legislature and signed into law by the governor.

The tax itself is one of the worst for gamblers. It is a 10% tax on gross receipts, with no deductions allowed. It would impact both professional and amateur gamblers, and would make New Hampshire the worst location for gamblers to reside in the United States.

Key votes in the legislature will occur this week. I'll keep you advised as I find out more information.

Related Posts (on one page):

New Hampshire Gambling Tax Now Law
New Hampshire Gambling Tax Moving Forward
New Hampshire Gambling Tax Not Yet Law
New Hampshire Adds Gambling Tax

Posted by Russ on Sunday June 21, 2009 at 11:16am. 0 Comments 0 Trackbacks

Aloha Gamblers!

Hawaii is a beautiful place. It's hard for me to think of a more beautiful or relaxing place for a vacation.

Residents of the Aloha State aren't likely to be gamblers. Hawaii prohibits all forms of gambling. Of course, if a Hawaiian makes a trip to Las Vegas and has some winnings, those are still taxable on their Hawaiian income tax return.

Hawaii's state legislature is among the most liberal in the country. Today's liberalism means high taxes and nannyism. Earlier this year Hawaii's legislature passed an increase in the marginal income tax rate to 11% on individuals earning more than $200,000. That legislation was promptly vetoed by Republican Governor Linda Lingle and just as promptly the veto was overridden by the Hawaiian legislature.

What I hadn't heard about until today was House Bill 1495. This bill would make gambling losses ineligible for tax deductions. This bill easily passed the state legislature; Governor Lingle has until July 15th to either sign the bill or veto it.

If you're a Hawaiian resident I urge you to contact the governor's office and let them know your feelings about this measure. If you're an amateur gambler and this legislation becomes law, you will face a very taxing situation.

Posted by Russ on Monday June 8, 2009 at 7:46am. 0 Comments 0 Trackbacks

Foreign Account Amnesty

Given my practice area, I'm very familiar with Form TD F 90-22.1. That's the form you use for reporting foreign financial and bank accounts to the Treasury and the IRS. There are severe penalties if you don't file this form but should have.

The IRS is offering a six month period (it began on March 23rd, and ends September 23rd) where you can voluntarily come forward and avoid some of the penalties. The IRS has published a FAQ that details one example where an individual has a $1 million foreign account that earned $300,000 in interest. If that individual voluntarily comes forward and pays the tax, penalties, and interest he would owe $386,000; if the IRS catches the individual he could owe $2,306,000. There's also the risk of time at ClubFed.

There are procedures that need to be followed in order to comply with this amnesty. If there are other potential criminal charges you should absolutely consult with an attorney. But this is a rare opportunity to avoid extremely high penalties. If you are impacted by this consult your professional tax advisor and/or attorney now.

Hat Tip: Roth Tax Updates, TaxProf Blog

Posted by Russ on Thursday May 7, 2009 at 8:27pm. 0 Comments 0 Trackbacks

New Hampshire Gambling Tax Not Yet Law

Last week I wrote about New Hampshire's proposed tax increases. Those taxes passed the lower house of New Hampshire's state legislature. However, they still must pass the state senate in New Hampshire. If you live in New Hampshire you may want to let your legislators (especially those in the state senate) know of your opinion of the proposed tax increases.

For the moment, New Hampshire isn't yet on my list of bad places for gamblers to reside. However, it's really knocking on the door.

Related Posts (on one page):

New Hampshire Gambling Tax Now Law
New Hampshire Gambling Tax Moving Forward
New Hampshire Gambling Tax Not Yet Law
New Hampshire Adds Gambling Tax

Posted by Russ on Sunday April 19, 2009 at 10:28pm. 0 Comments 0 Trackbacks

New Hampshire Adds Gambling Tax

Live Free or Die may be the motto of New Hampshire, but the formerly conservative state that believed in very low taxes elected a Democratic majority in the state legislature last year. Shock of shocks, tax increases are coming. And a particularly insidious tax increase will hit gamblers.

The New Hampshire House today passed a new budget that includes numerous new taxes and tax increases. As the Manchester Union-Leader reported:

The House, by a 182-165 vote, created or increased taxes on tobacco, rooms and meals, gambling winnings, estates and capital gains. The bill, HB 2, also raises the gasoline tax, with all those funds to go toward state and local road construction and improvements.

The gambling tax is particularly bad. The new tax is 10% on all gambling winnings above $600. While proponents noted that it would only impact big-time bingo games, what will be the impact on New Hampshire residents who head to a casino? The way the legislation is written it could impact professional gamblers residing in New Hampshire, and subject them to a 10% tax on their winnings. (Frankly, the legislation is so poorly written towards gambling that it will take court cases to determine what is or isn't being taxed.) I for one don't think it's worth taking a chance and for the professional gamblers out there it's definitely time to consider voting with your feet.

So what should a New Hampshire gambler do? For the amateur gambler, you may want to consider Maine or Vermont. Unfortunately, Connecticut and Massachusetts don't allow gambling losses while New York tax rules will cause phase-outs of itemized deductions. Professional gamblers can also consider Connecticut and Massachusetts as both states have relatively low income taxes. (Professional gamblers are allowed to net their wins and losses, so they are not impacted by the inability to deduct losses in Connecticut and Massachusetts.)

Here's the complete list of states for gamblers to avoid:

Connecticut*
Illinois*
Indiana*
Louisiana (itemized deduction limitation)
Massachusetts*
Michigan*
Minnesota (because of its AMT)
Mississippi (Only MS gambling deductions are allowed)
New Hampshire (10% gambling tax on winnings over $600)
New York (itemized deduction limitation)
Ohio*
West Virginia*
Wisconsin*

*Losses not allowed; impacts amateurs only

Related Posts (on one page):

New Hampshire Gambling Tax Now Law
New Hampshire Gambling Tax Moving Forward
New Hampshire Gambling Tax Not Yet Law
New Hampshire Adds Gambling Tax

Posted by Russ on Thursday April 16, 2009 at 5:14pm. 1 Comments 0 Trackbacks

Three More Questions from the Mailbag

Three more questions from the mailbag this week. We'll take a look at pensions, extensions, and putting money aside for 2009 taxes.

First, a Californian asks: If I retire with a government pension (Calpers) from California, will I have to pay California income tax on that pension if I become a resident of Nevada?

Would you think that the Franchise Tax Board would stoop to such a level as taxing retirees' pensions when they left California? You detected the sarcasm, I hope.

Indeed, the FTB already tried and did attempt to tax out-of-state retirees under the theory that the pensions represent money earned in California and are, thus, taxable to California. However, there was an uproar from retirees who had escaped the Golden State. Congress responded by passing HR394 in 1996 (now Public Law 104-95); this was signed by President Clinton. States are now prohibited from taxing out-of-state retirees' pensions.

Do be careful, though, and wait until you are domiciled outside of California before taking that distribution or California will tax you.

Next, I'm asked: I'm going to owe a lot in federal taxes next month, but money is going to be tight until June. What can I do to stave off Uncle Sam until then? (Luckily, I'm a resident of Texas and don't have to deal with state income taxes.)

There are two choices you should discuss with your professional tax advisor. First, you could file your return, pay what you can, and arrange a payment plan for the remaining balance. If you owe $25,000 or less to the IRS a payment plan is generally automatically granted. A second option is to file an extension, pay what you can, and then file your return and pay the balance due in June.

Either way you will owe interest (it's statutory) and a failure to pay penalty (0.5% of the tax due per month late). However, as long as you file an extension (or your return) you will avoid the failure to file penalty of 5% of the tax due per month.

The choice that's best for you depends on your situation and the amount you owe. As I said, your professional tax advisor should be able to steer you in the right direction.

The final question for this week: I graduated from college in December, and did not earn any income in 2008. However, I just won $62,000 in a poker tournament this past week. Am I required to pay estimated taxes to the IRS? How much should I put aside for taxes this year? I live in Florida, if that helps you in giving me advice.

Congratulations on your win. And I'm glad you're considering the tax impact of your victory. In the United States, gambling income is taxable, so you will owe federal income tax on your winnings. A rule of thumb is to put aside at least one-third of your winnings for taxes.

Exactly how much you will need depend on a variety of factors: your other sources of income, whether you're a professional gambler or an amateur, your net poker winnings for the year, what state you reside in, your marital status and dependents, whether you will invest in a retirement account, etc.

Since your income was $0 in 2008 you do not have to make any estimated tax payments during 2009. (You never have to make estimated payments, but if you don't and you are supposed to you will pay an estimated tax penalty when you file your return.) You also reside in Florida, a state with no income tax. If you were my client I'd advise you to take about $20,000 of your winnings and put it in a safe investment that can be cashed out early next year.

This week I may have made one, two, or perhaps all three of the questioners happy with my responses. I'll have to see if I can keep that streak up next week.

Posted by Russ on Sunday March 22, 2009 at 8:00pm. 0 Comments 0 Trackbacks

When a Gambler Loses...

The Tax Code is anything but fair towards gamblers. This is especially true for professional gamblers; they're in one of the few professions where you can't lose. Section 165(d) states that losses from wagering (gambling) transactions are only allowable up to the amount of wins.

So let's look at John Doe, a normally winning professional gambler. He has a bad year, and his $100,000 of wins are offset by $150,000 of losses. To top that off, he has $30,000 of expenses. He just lost $80,000, right?

Well, maybe not. A new IRS position paper notes that the business expenses may be eligible for a net operating loss (NOL) carryforward/carryback in a year that a gambler loses.

As the paper notes, it's a case of language. Section 165(d) states, "losses from wagering transactions shall be allowed only to the extent of the gains from such transactions." [emphasis added] Those two words are the key: Does the statute mean the transactions or the activity?

The paper notes that Whitten v. Commissioner (T.C. Memo 1995-508) agrees with this line of reasoning and allows expenses to be deducted. On the other hand, there is a string of cases holding the contrary point of view. These go back to 1951 (Offutt v. Commissioner, 16 T.C. 1214; Estate of Todisco v. Commissioner, 757 F 2d 1 (1st Cir. 1985) affg T.C. Memo 1983-247); one of these cases is Kochevar v. Commissioner (T.C. Memo 1995-607).

So what does this mean for the gambler who has a bad year? First, you can't deduct losses in excess of wins. However, you may be able to claim expenses, and carry them forward or backward as a NOL carryforward/carryback. The "may" is very necessary. The Estate of Todisco case may bind those gamblers who are in the 1st Circuit (Maine, Massachusetts, New Hampshire, Rhode Island, and Puerto Rico) and they may not be able to try this strategy.

Additionally, a position paper in no way binds the IRS to this view. It's one attorney's opinion. The staff at the IRS hasn't been favorable towards gamblers in the past, and nothing prevents them from taking a contrary view. However, for those gamblers who wish to be aggressive having some expenses carried forward can mollify (to some degree) a bad year.

Anyone taking this position should absolutely discuss this with their own personal tax professional. Taking this position will definitely increase the risk of audit of the gambler's return; you could win this part of your argument only to have other items on your return thrown in your face. Additionally, this position paper doesn't bind the IRS or the Tax Court.

Posted by Russ on Saturday March 21, 2009 at 9:00pm. 0 Comments 0 Trackbacks

Weekend Mailbag

Three questions of interest this weekend. The first deals with moving to Nevada, the second with the requirement to report foreign financial accounts, and the third

First, a reader asks: I want to move to Nevada. I will move my busines there also. However, most of my business will still be done in California. Will I still have to pay income taxes on my business profit and income from other investments?

If you truly move from California to Nevada, and are a Nevada resident, you will no longer owe California income tax. Similarly, if your business reincorporates (if it is a corporation) or otherwise changes its domicile to Nevada, and no longer is present in California, then it, too, will no longer be taxed by California.

This being tax, there are several caveats to be aware of. Among these are the following:

In the year you move, you will need to file a partial year California tax return. California will tax you on all California source income for that year.

Be aware that California, like many other states, will attempt to tax you if you spend two weeks (or more) in the Golden State on business.

There are several other "gotchas" that you should discuss with your tax professional.

Next, I've gotten several questions relating to the filing of the report of Foreign Bank and Financial Accounts. Here's one of many: I read on your blog of the need to file the Report of Foreign Accounts. But I don't want to because it will increase my risk of audits, and I don't think it's required. I read on 2+2 that online poker accounts are 'transfer accounts' and not foreign bank accounts. I'm not a big gambler, so why should I file this form?

First, Congress wrote this law. The IRS and the Department of the Treasury have the thankless task of interpreting this law.

And this law is fairly clear: Foreign financial accounts must be reported if an individual has $10,000 or more in one or more foreign financial accounts. Casinos in the United States fall under financial institution reporting requirements; why shouldn't casinos in other countries be considered foreign financial institutions?

Additionally, many of these online casinos offered "echecks" and would take money directly from patrons' checking accounts. Those are activities that banks perform.

As to why you should file this form, it's simple: It's required. If you don't, and you are caught, you can face up to a $10,000 fine for non-willful non-reporting and a minimum $100,000 fine for willful non-reporting. You can also find yourself sent to ClubFed. If you think that the defense "I didn't know about this" or "I was a small time player" will work, I'll tell you now that neither will.

If you're such a small-time gambler, you're not a likely target for an audit (the IRS goes where the money is; generally, the more you make the higher your risk of audit). While the TwoPlusTwo poker forums have excellent poker information, you have to be very careful when you read legal and tax threads. The defense, "I relied on Joe Schmoe from TwoPlusTwo" will likely result in the judge asking you if he was your paid professional preparer.

Yes, you're not likely to get caught. The odds are definitely in your favor. But it's the law to report these accounts. You may not like the idea that the same people who enforce this law (the IRS and the Department of the Treasury) get to interpret this law. Unfortunately, that's the way it is, and you will get no sympathy from the IRS, the Department of the Treasury, or a judge. I'm advising all my clients who have these accounts and meet the reporting requirements ($10,000 or more at one or more foreign financial accounts) to report them.

Here's the third question. I'm a personal trainer, and I can't believe the answers I've gotton [sic] from my accountant. I can't believe that gym shoes aren't deductible for me, and that gym memberships aren't deductible for my clients. Tell me he's wrong.

Sorry, your accountant is generally correct. For most individuals, health club memberships are not deductible. I'd probably go insane during tax season if I didn't go to the gym but Congress says I can't deduct that. Congress makes the laws, and that's the way it is. (A few people who have to go to the gym for medical reasons may be able to take a gym membership as a deductible medical expense. Of course, that's subject to a 7.5% Adjusted Gross Income limitation so not many will be able to deduct it that way, either.)

As for clothing, to be deductible it must not be usable outside of work. A policeman's uniform, for example, is clearly deductible. However, his black socks wouldn't be. Gym shoes aren't deductible as they can be used outside of a health club.

Well, perhaps I made one of the three individuals who wrote me happy. As usual, I suggest you consult your own tax professional on any issues that you have.

Posted by Russ on Saturday March 14, 2009 at 9:01pm. 0 Comments 0 Trackbacks

Online Gambling Addresses

The IRS and Department of the Treasury recently stated that online gambling sites are foreign bank accounts that must be reported. There's a problem, though. Most of these entities don't broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it's none of your business.

Well, not fully completing the Form TD F 90-22.1 can subject you to a penalty. I've been compiling a list of the addresses of the online gambling sites. It's presented below.

Note: This list is presented for informational purposes only. It is believed accurate as of July 1, 2009. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.

(show)

If anyone has additions to the list feel free to email them to me.

Posted by Russ on Tuesday March 10, 2009 at 4:59pm. 0 Comments 0 Trackbacks

The Stop Tax Haven Abuse Act and Online Gambling

Senator Carl Levin (D-MI) and others introduced the Stop Tax Haven Abuse Act on Monday. The Act targets financial transactions into (or out of) jurisdictions that are considered to be tax havens.

Senator Levin has posted a summary of the legislation. Given that I expect many Republicans to support this measure I think it has a good chance of passage.

There's some interesting language in the bill, and online gambling may end up impacted by this. Many of the online gambling sites are located in tax havens, including the Isle of Man, Gibraltar, Malta, Costa Rica, and Antigua and Barbuda. The Act states the following for Transfers of Income:

Transfers of income – In a tax proceeding, any amount or thing of value –

* a) transferred to a U.S. person (other than a publicly-traded corporation) directly or indirectly from an account or entity in an Offshore Secrecy Jurisdiction, or
* b) transferred from such a U.S. person directly or indirectly to an account or entity in an Offshore Secrecy Jurisdiction, will be presumed to represent previously unreported income to the U.S. person in the year of transfer.

So if you're not keeping records, everything moved to or from an online site would be considered income unless you could prove otherwise.

Additionally, the FBAR (foreign financial account reporting) would be strengthened. "Presumption is that any account in an Offshore Secrecy Jurisdiction contains funds sufficient to trigger this reporting requirement." So all online gambling accounts would have to be reported in any of these countries.

There's a lot in the act, and quite a bit of it is laudable. As the recent Swiss escapades have shown, there's plenty of tax haven abuse occurring. Unfortunately, online gambling may get caught in the crossfire.

The TaxProf Blog has links to news commentary on the proposed legislation. Additionally, on Wednesday there will be a hearing on the Swiss tax scandal in Washington.

Posted by Russ on Tuesday March 3, 2009 at 8:43pm. 0 Comments 0 Trackbacks

Another Headache for Young Gamblers

Many online gamblers are college students and may be considered dependents. You can be claimed as a dependent if your parent(s) provide at least 50% of your support and you are under 18 or a full-time college student under age 24. (A full-time college student is defined as someone taking at least a half-load of courses for at least five months who is working towards a degree at an accredited college or university.) Why is there a headache? Because of a law Congress passed last year.

As part of lowering some taxes Congress extended the kiddie tax until age 24. The kiddie tax is normally thought of as a tax on investment earnings. However, the definition is a bit different than that. "For Form 8615, “investment income” includes all taxable income other than earned income as defined on page 2." Gambling income is not considered earned income.

I had my first taste of Form 8615 today. (Form 8615 is the form used to calculate the tax for an individual impacted by the kiddie tax.) Your tax professional will likely be asking you for a lot of information if you are impacted by this. He or she will need to know your parents income and filing status. You will likely pay more in tax. And even if you are not claimed as a dependent you may still be impacted by this: The law applies if you can be claimed as a dependent.

My client today was lucky. I don't believe he can be claimed as a dependent so he's not impacted by this law. However, I know that this will impact the tax returns of some of my clients and will definitely impact a lot of college students who will be completely unaware of the law. Additionally, many parents will not want their children to know the exact details of what they make yet this new law will either force that to occur or have the parents claim the income on their own tax returns.

Posted by Russ on Saturday January 31, 2009 at 1:24pm. 0 Comments 0 Trackbacks

Online Casinos Are Foreign Financial Institutions

Casinos in the United States fall under the same currency requirements as banks and other financial institutions. Congress and the IRS recognized that money laundering and other currency shenanigans could occur at a casino. I've always felt that one day the Treasury Department would consider offshore (foreign) online casino to be a foreign financial institution and subject to reporting. Well, that day is here.

Every year I've sent an inquiry to the FBAR group at the Treasury on this subject. This year they responded that these accounts must be reported if the account value requirements were met.

To determine if you need to report your foreign financial accounts (including online casinos), determine the maximum value of each account during 2008. Add up the total. If the sum is $10,000 or more all your accounts must be reported.

You have to report these accounts in two ways. First, you must check a box on the bottom of Schedule B and list the country or countries where the accounts are. Second, you must file Form TD F 90-22.1 with the Department of the Treasury (not the IRS) by June 30th. No extension is available for this reporting requirement. Note that the form must be received by June 30th, not postmarked by that date.

The Treasury Department has revised Form TD F 90-22.1 for 2008. You used to have to just list the name of the financial institution, the account number, and indicate what range of money your account held (e.g. $10,000 - $99,999). This year you must list out the maximum value of each account and the address of the financial institution.

Indicating you have an account at a foreign financial institution doesn't change your tax but it does increase your risk of audit. Given that the penalty for willfully not reporting a foreign financial account(s) is the greater of $100,000 or half the value in the account, you will need to report them.

Posted by Russ on Tuesday January 27, 2009 at 8:27am. 5 Comments 0 Trackbacks

Three Gambling Questions

Three interesting questions were recently emailed to me regarding gambling tax issues. Let's take a look at some of the issues of concern:

1. "I'm planning on playing at an upcoming poker tournament in Los Angeles and heard that if I win a prize California will withhold 5% of my winnings. I'm a Canadian citizen and can't see how they can do that. (I know that the IRS will withhold 30%, and that I am able under the US-Canada Tax Treaty to get some to all of that back.) Please advise."

Well, I have bad news for you. The withholding rate is not 5%; rather, it's 7%. You are earning that income in California, and California law says that anyone who earns that income is subject to state income tax.

I do have good news for you in one respect. If you're a professional gambler and are paying Canadian income tax, the tax you pay to California is a foreign income tax that you will be able to get a tax credit for. However, if you're an amateur gambler you are just plain out of luck (Canada doesn't tax gambling income from amateurs).

As to why you're paying the tax, that's a long and convoluted story. The Tax Foundation conducted a study on this tax (back in 2004) and concluded that it was "poor tax policy and should be stopped." The jock tax started, believe it or not, with Michael Jordan of the Chicago Bulls. The Franchise Tax Board got the idea that they should share in Mr. Jordan's salary. Illinois then retaliated and instituted their own jock tax. Now they're universal.

And California wants the jock tax from anyone and everyone. If you win a contest in California expect to have some of your money withheld. The ~~Bronze~~ Golden State is broke and this isn't going to change soon.

2. "I'm a professional poker player who won a very nice six-figure bad beat jackpot. I've also won into well six figures this year [earnings] from poker. My question is can I treat the BBJ as gambling winnings while treating my poker income as, er, income."

First, for the non-poker players reading this, a bad beat jackpot is when a very good hand (say, four of a kind) is beaten by a better hand (say, a straight flush). The rules for bad beat jackpots vary from casino to casino and they are not universal. Indeed, many cardrooms don't have bad beat jackpots.

The answer to this gentleman's question, like lots of poker answers, is it depends. Was the jackpot casino funded or player funded? A jackpot funded by the casino is a prize; when you win such a prize it's like winning a sweepstakes. The casino is providing this out of the goodness of its heart (or hoping that the publicity helps draw more gamblers to their casino); the jackpot in this case should be reported on a Form 1099-MISC and would be included in Other Income (line 21, Form 1040).

However, if the jackpot is funded out by a "jackpot drop" or an additional small rake (usually $1 out of each pot), then it's funded by the players themselves. In that case, the jackpot is gambling income and should be reported on a Form W-2G.

The person who asked this question is a professional gambler (and a successful one, too). He'd like the jackpot to be reported as Other Income because then he wouldn't owe self-employment tax on the income. My suspicion, though, is that it was player-funded and gambling income subject to self-employment tax. That's just a suspicion, and only the correspondent knows for sure.

3. "Two years ago I was traveling to Costa Rica and won over $100,000 at the casino. Now my ex is threatening to tell the IRS about the win. What should I do?"

I've said on several occasions that one of the IRS' best sources of tips are disgruntled ex-spouses and ex-girlfriends. I'm not a marital counselor so I can't give any advice on that portion of the problem.

It sounds like you didn't report the gambling income. Why not amend your tax return and report the income, pay the tax, penalties, and interest? It's almost always better to come forward than to have the IRS come after you. (Don't forget your state income tax, too.) Given that this issue has legal ramifications you should consult an attorney if you have not already done so.

Three questions, and three answers that likely didn't make anyone happy. The Tax Code remains unfair towards gamblers and I don't expect that to change anytime soon.

Posted by Russ on Thursday January 15, 2009 at 6:56pm. 0 Comments 0 Trackbacks

Two Gambling Cases at the Tax Court

The Tax Court looked at two gambling related tax cases today. In the first case the petitioners thought there was discrimination; in the second case the question was whether or not the petitioners were professionals or amateurs.

In the first case (Sjoberg v. Commissioner, T.C. Summary Opinion 2008-162), the petitioners knew they were recreational gamblers (they stipulated to that). They had won a $4,000 jackpot; they had gambling losses that would allow them to write off that amount so they didn't include the income (noted on a W-2G) on their tax return. If they had included the income they would have had an additional $660 in tax (from additional tax on social security benefits). The IRS audited them, assessed the tax and a $132 accuracy-related penalty.

The petitioners didn't dispute the IRS' calculations. Instead they,

"...contend that this treatment of gambling winnings and losses is discriminatory against the elderly and should not be enforced. Petitioners note that today’s casinos are like “Disneyland” to the elderly, offering all sorts of freebies to entice the elderly into casinos to gamble. Petitioners contend that respondent needs to update the tax rules to take into account today’s casino operators, casino operations, and customers...Lastly, petitioners allege that some types of gambling winnings are not required to be reported to respondent by the casinos (generally poker and blackjack), and petitioners claim that such differences in the reporting of gambling winnings constitute discrimination."

But the court doesn't make policy decisions (Congress does) and they owe the additional tax and the penalty.

In the second case (Freese v. Commissioner, T.C. Summary Opinion 2008-161), petitioners recorded their gambling as a business. Given that they resided in Minnesota that's a good idea. Under Minnesota's state income tax AMT the petitioners would likely have faced high taxation. There was a problem, though: Were the petitioners conducting their gambling as a business?

Petitioners were employed and gambled one or two nights a week. They did not keep a log of their gambling, they didn't keep a separate bank account, and didn't keep track of their gambling income and expenses. If you're going to be a professional, you need to treat your business as such. "Petitioners did not maintain any meaningful records relating to their gambling activity."

Unfortunately for petitioners, their CPA didn't ask some rather basic questions. Though the CPA asked for any W-2Gs they received, he didn't ask for the income from their slot play that didn't cause a W-2G to be issued. (W-2Gs are only issued for slot machine jackpots of $1,200 or more.)

The court concluded,

Petitioners’ gambling activity in 2005 clearly did not qualify as a trade or business. Petitioners did not gamble with continuity and regularity. Petitioners regarded their gambling activity as recreation they shared, and petitioners did not expect to earn a profit from gambling. Petitioners did not maintain books and records relating to their gambling activity. They did not conduct their gambling activity in a businesslike manner. See Commissioner v. Groetzinger, 480 U.S. 23 (1987); sec. 1.183-2(b), Income Tax Regs. Petitioners’ gambling activity did not rise to the level of a trade or business, and petitioners are not allowed to deduct gambling expenses in excess of gambling income.

So if you're going to be considered a professional gambler, treat your gambling as a business. Keep good records. Know your income and expenses. Consider a separate bank account for your gambling. And keep good records. Yes, I said that twice but the importance of a gambling log cannot be overstated for the professional gambler.

Posted by Russ on Tuesday December 23, 2008 at 1:48pm. 0 Comments 0 Trackbacks

More on the World Series of Poker and Income Tax

Earlier this week I posted on the tax bite that the top nine finishers at this year's main event of the World Series of Poker faced. This year's winner, Peter Eastgate, hails from Denmark. Assuming he is subject to Danish taxation he faces an effective tax bite of 72.27%.

I've been told that he has since moved to England, and as a citizen of the European Union (E.U.) he is now subject to British tax law. Others have told me that Britain doesn't tax professional gamblers, and that Mr. Eastgate will only have to pay tax on the first $900,670 of his winnings.

There are several flaws in this argument, though. Mr. Eastgate was a Danish citizen (and resident) when the tournament began. Couldn't SKAT, the tax agency of Denmark, argue that he moved simply to avoid the tax, and that he still owes the tax? Another argument that could be made is that it's the date he entered the tournament that matters, not the date of completion.

My suspicion is that Mr. Eastgate will get a bill from SKAT, and it's going to be big. The likely outcome is that this will end up in court. There's precedent for tax litigation involving the winner of the World Series of Poker; Joseph Hachem won the event in 2005 and had to fight the Australian Tax Office to avoid Australian tax on his winnings (he won).

Finally, if he doesn't owe tax in Denmark he likely will owe tax in Britain. The United Kingdom does tax professional gamblers on their winnings. I've received a couple of emails stating that Inland Revenue hasn't been enforcing tax on professional gamblers' winnings. Given the high profile nature of Mr. Eastgate's victory it's hard for me to believe that Inland Revenue won't notice if Mr. Eastgate ignores the British taxman. Still, the tax rate in Britain (about 40%) is far less than the 72.27% Mr. Eastgate would owe in Denmark. This may be a case where the taxman rings the bell twice.

Related Posts (on one page):

More on the World Series of Poker and Income Tax
The Real Winners at the World Series of Poker

Posted by Russ on Thursday November 13, 2008 at 6:32pm. 0 Comments 0 Trackbacks

The Real Winners at the World Series of Poker

This year's World Series of Poker concluded early this morning at the Rio Hotel and Casino in Las Vegas. The winner of the main event won $9,152,416 but would he actually end up with all that money?

This year's winner was Peter Eastgate from Denmark. The United States and Denmark have a tax treaty. Because of the treaty Mr. Eastgate doesn't owe a penny to the IRS. That just leaves the Danish tax authorities.

Denmark's tax agency is called SKAT. Denmark, like the United States, does tax gambling winnings. For casino gambling (which is where I believe this will be classified) the tax rate is 45% on the first 4 million Danish Kroners; it's 75% on income above that. Today $1 is worth 5.88907 DKK; Mr. Eastgate won 53,899,250.70 DKK before taxes. Mr. Eastgate will owe about 39,224,438 DKK in tax ($6,660,545). Put another way Mr. Eastgate will keep 14,674,813 DKK ($2,491,871) of his winnings—just 27.23% of his prize. Yes, he faces an effective tax rate of 72.77%. Ouch.

Ivan Demidov of Moscow, Russia finished second and won $5,809,595. The United States and Russia also have a tax treaty and Mr. Demidov won't have any of his winnings withheld by the IRS. Russia has a 13% flat tax rate, so Mr. Demidov will owe about $755,247 to the State Taxation Service of Russia.

Third place went to an American, Dennis Phillips of Cottage Hills, Illinois. Mr. Phillips won $4,517,773 for his efforts. He's an amateur gambler so he won't owe self employment tax on his winnings. Still, he can expect to pay $1,568,950 to the IRS and $135,533 to the Illinois Department of Revenue.

Ylon Schwartz of Brooklyn, New York, finished in fourth place for $3,774,974. He is a professional gambler so he'll owe self-employment tax on his winnings. He'll also owe state and New York City income tax. His likely tax bite is $1,396,304 to the IRS and $387,966 to the New York Department of Tax & Finance.

Two Canadians finished in fifth and sixth place. Scott Montgomery of Perth, Ontario finished in fifth place for $3,096,768. The US-Canada tax treaty specifies that 30% of his win will be withheld to the IRS. Thus, $929,030 was withheld. Mr. Montgomery is a professional gambler so he will owe tax on his win to Revenue Canada. However, he will be able to take a credit on his Canadian tax return for the money withheld to the IRS. As Canada's tax rate is 29% he likely won't have to pay any additional funds to Revenue Canada. However, when provincial taxes are included the tax rate becomes 46.41%. Thus, Mr. Montgomery will owe tax in Canada: about $491,728 after the credit for the tax withheld to the IRS. [My thanks to the commenter who pointed out the impact of provincial taxes.]

The sixth place finisher was Darus Suharto of Toronto. Mr. Suharto is an accountant, so he won't owe tax to Revenue Canada on his won. However, of the $2,418,562 he won, $725,569 was withheld per the US-Canada tax treaty. He may be able to claim a credit on his Canadian tax return for years to come based on this withheld money and eventually get it back.

The Franchise Tax Board (FTB) was rooting for David Rheem or Kelly Kim to finish in first place. These two Californians finished in seventh and eighth place, earning $1,772,650 and $1,288,217 respectively. Mr. Rheem will owe about $651,262 to the IRS and $170,302 to the FTB; Mr. Kim will owe about $470,995 to the IRS and $121,074 to the FTB.

Craig Marquis of Arlington, Texas finished in ninth place. He is also a professional gambler, and of the $900,670 he won he'll have to fork over about $328,911 to the IRS.

Here's a table summarizing the tax bite:

Amount won at Final Table	$32,731,625
Tax to SKAT (Denmark)	$6,660,545
US Tax Withheld to IRS	$1,654,599
Add'l Tax Owed to IRS	$4,416,422
Total Tax to IRS	$6,071,021
Tax to State Taxation Service (Russia)	$755,247
Tax to Revenue Canada	$491,728
Tax to NY Dept of Tax and NYC	$387,966
Tax to California FTB	$291,376
Tax to Illinois Dept of Revenue	$135,533
Total Taxes	$14,793,416

That's a total tax bite of 45.20%.

So congratulations to the winners. Just remember that a winner—perhaps the biggest winner of all—is the taxman. As we all know the house always wins.

Related Posts (on one page):

More on the World Series of Poker and Income Tax
The Real Winners at the World Series of Poker

Posted by Russ on Tuesday November 11, 2008 at 7:04am. 6 Comments 0 Trackbacks

He Gambled...And He Lost

Renato Medina used to own Lucky Chances, a Colma, California cardroom (poker club). Colma, which may have more tombstones than people, was the target of a federal corruption investigation. Mr. Medina was found to have been taking personal deductions on his corporate tax return. Last year he pleaded guilty to three counts of tax evasion. On Thursday he was ordered to serve fifteen months at ClubFed (per his plea agreement). He has already made restitution of $973,841. Mr. Medina no longer owns Lucky Chances (his sons own the cardroom).

What Mr. Medina did—taking personal deductions on his corporate return—is one of the more popular ways of cheating on taxes. The government knows this, and this is also one of their more popular areas in audits. Be aware of this if you're tempted by following in Mr. Medina's footsteps.

Posted by Russ on Saturday November 1, 2008 at 7:18pm. 0 Comments 0 Trackbacks

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