We Get Letters

It is that time again. Three or four times a year, we answer questions that we receive from readers. Although you may already know the answers to these questions, please remember that all of us were novices at one time. However, even you might learn something, as nothing stays the same. The first question, please.

Question: Are "professional" gamblers required to report estimated quarterly earnings, or do they pay taxes at one time annually?

Answer: Professional gamblers are subject to the same rules as everyone else regarding estimated payments. To provide for current payment of income taxes not collected through withholding, the law requires individuals in some instances to pay a portion of their tax currently. The general rule is that at least 90 percent of an individual's final income tax is to be paid through either withholding or estimated payments. If at the time you file your taxes, your tax liability is less than $1,000, you are not required to make estimated payments. If you owe more than that when you file, you will have to pay an underpayment of estimated tax penalty. The estimated payments are due in four installments, the first of which is due on April 15 of the current year. The second is due on June 15, the third on Sept. 15, and the fourth on Jan. 15 of the following year. So, how do you know on April 15 of this year what your total taxes will be for this year? There is no real answer, and that is why they are called estimated tax payments, but by the end of the year, you should know what you will make for the year.

There are exemptions; if you paid no tax last year, you are not required to make estimated payments. Also, if you're retired and, under certain circumstances, disabled or under a hardship, you are also exempt. There is a "safe harbor" of sorts to avoid a penalty: (1) if your estimated payments total 90 percent or more of the tax shown on your return for that year, (2) if your estimated payments equal 100 percent of last year's tax, and (3) you use the annualized income installment method to make estimated payments (this is rather obscure, so we have chosen not to explain it at this time).

Q: I recently won a sports wager in Las Vegas. It was a $40 bet with 60-1 odds, paying out $2,400. I have not collected it yet, but am curious if this will have to be claimed, or is still below the limit for a sports wager to have to be taxed? Thanks.

A: I hate to be the one to tell you, but all gambling winnings are taxable, no matter how small. The sum of all of your winnings (whether reported to the IRS or not) must be reported on your return for the year in which the winnings occurred. All losses also should be reported, unless they are greater than your winnings, in which case you can report losses only up to the amount of your winnings and no greater. The amount of the losses in excess of the winnings cannot be carried forward or backward. It is true that certain winnings, regardless of how large, are not required to be reported to the IRS. It depends on the type of game and the amount won. IRS form W2-G is the form that casinos and all other gaming enterprises are required to use to report winnings to the IRS. This requirement applies to the following forms of gambling and their respective winnings amounts:

Bingo and slot machines, including video games - equal to or greater than $1,200

Keno - $1,500 after the amount won is reduced by all tickets for the same game (this is not true for bingo and slot machines)

Horse racing, dog racing, and jai alai - $600 or more, unreduced by wagers, if such winnings are a least 300 times the amount wagered

State lotteries - $600 or more, unreduced by wagers

These are the only games specified by the IRS in Revenue Procedure 77-29. Then why do some cardrooms and casinos issue W2-G forms or 1099 forms for poker tournament winnings? This is often the result of an IRS examination of a casino or cardroom in which the IRS imposed these rules as a bargaining chip. Others sought a private letter ruling from the IRS regarding withholding for tournaments, and others sought the guidance of their accountant, CPA, enrolled agent, or tax attorney.

We hope you found these questions and answers educational. Should you ever have a problem with the IRS, seek professional help. Do not take a copy of one of our columns to the IRS to defend your position, as our columns are informal discussions. To defend your position, you need to know the code sections, regulations and revenue rulings, and court cases that apply to your situation.

If you have any questions regarding tax regulations as they apply to gaming that you would like to see answered in Card Player, please mail/e-mail them to us. We will keep your identity confidential. If you would like to utilize our professional services or order our book, The Tax Guide for Gamblers, please call (800) 829-7271 (804-0439 in Las Vegas). R.B.S. will prepare your return without your having to leave the comfort of your home no matter where you live. For more information, see our ad in this issue.