More Questions and Answers

During the four weeks preceding the tax deadline of April 15, we received more than twice as many questions than during any other four-week period since we started this column.

If you do not mind, we would like some feedback from you. Do you want to see fewer questions, more questions, or are things just about right? With the phenomenal growth of poker, we have been experiencing an incredible increase in questions. Many are in the "novice" category, but some are new to us and should prove to be interesting to you.

Question: In 2003, I won a bad-beat jackpot and received a W-2G. During the year, I also had a combination of winning and losing poker and blackjack sessions. At the end of the year, my winning sessions (including the W-2G) totaled approximately $30,000 and my losing sessions totaled $27,000, for a net win of $3,000 for the year. Pursuant to one of your earlier columns and an IRS tax notice you referred to, the proper way to report these amounts on the federal tax return for a nonprofessional gambler is to include the total of all winning sessions on Page 1 and the total of all losing sessions on Schedule A. For federal tax purposes, this resulted in no adverse consequences, because I was filing Schedule A regardless of the gambling losses. For state tax purposes (I live in Ohio), this resulted in a seemingly inequitable result. Ohio appears to require that you pay taxes based on "federal adjusted gross income," with no specified allowance/deduction for gambling losses. My question is this: Are you aware of any arguments that I could make to pay state income tax on the net amount of my winnings ($3,000) instead of the gross amount ($30,000)? Your thoughts or opinions would be greatly appreciated.

Answer: This situation is pretty standard in the Upper Midwest. States such as Illinois, Indiana, and Ohio, to name a few, require you to pay tax on your gross winnings, but prohibit any deduction for gaming losses. What an unfair law! The only way to get around it is to file as a professional, which allows you to take the losses off your adjusted gross income, thus substantially reducing your taxable income.

Q: My gambling winnings (reported on W-2Gs) push my total adjusted gross income over the threshold that causes a limitation on itemized deductions. Even though I can claim gambling losses to the extent of my winnings, my other deductions are limited because of this. Do you know of any work-arounds or case law to correct this obvious loophole in the tax code? It looks like this is going to cost me almost $1,000 this year (it cost me last year, as well).

A: As was the case in the answer to the previous question, the only way to get around it is to file as a professional.

The tax code was badly written. It states you can deduct losses to the extent of your winnings, but then Congress created something called a "Phase Out," which is a technique to raise the taxes on those in higher brackets, and it works like this: When the value of your income rises to a certain level, the total value of certain itemized deductions is reduced by a certain percentage. This results in the percentage you are allowed to deduct decreasing as your income increases.

Q: Having retired from the accounting profession, I have been playing poker for the past few years on a full-time basis, and as such have been filing Schedule C. For the first time, in 2003, my poker losses exceeded my winnings. Please advise as to the following: (1) I am aware that gambling losses as an itemized deduction are limited to gambling winnings. Is this true for Schedule C filers? (2) If losses are limited, (A) can they be carried forward? (B) can you still deduct a loss on Schedule C for other business expenses? and © what about medical expenses?

A: You sure packed a lot of questions into a small area. (1) Yes, losses are still limited to the amount of winnings. Winnings and losses include any and all types of gambling. (2A) No, they cannot be carried forward. (2B) Only business expenses pertaining to gaming can be deducted, but your total losses and business expenses cannot exceed your winnings. (2C) Medical expenses are handled the same whether you are claiming gaming transactions or not. They have no connection with each other.

If you have any questions regarding tax regulations as they apply to gaming that you would like to see answered in Card Player, please e-mail them to [email protected]. 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. 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.