Last issue's column examined many of the negatives that gamblers face when complying with U.S. laws on taxes. In Part 2 we'll look at some deductions available for gamblers, as well as the problem area of state taxes.
The Tax Code forces the amateur gambler to record some potentially ridiculous amounts as "income." For example, a gambler might have $300,000 of winning sessions and $275,000 of losing sessions. His Adjusted Gross Income (AGI) would be artificially raised by $275,000. There's actually a benefit to this.
Most taxpayers deduct their state income taxes as an itemized deduction on Schedule A of their tax returns. However, you can choose to deduct sales taxes instead by actually calculating the sales taxes you pay or by using a formula based on your AGI. So the amateur gambler may find that taking the sales tax deduction is a good choice.
The professional gambler has a large scope of deductions available. He can deduct any expenses that are "ordinary and necessary" in the course of conducting his business. Ordinary expenses are those that are common and accepted in your business; necessary expenses are those that helpful and appropriate. Please remember that it is considered a business, and you need to save your receipts.
Some, though not all, of the expenses a professional gambler can deduct are travel to casinos, books and other training materials, training websites, a computer used to play online poker (if it is not used 100 percent for business, your deduction will be based on the percentage of business usage), and office supplies. However, you generally cannot deduct mirrored sunglasses. Clothing and related items can only be deducted if they can solely be used in a business. A good example of clothing that can be deducted is a policeman's uniform.
Many taxpayers are wary about taking a home office deduction. This used to be a red flag leading to a higher possibility of being audited. However, that's no longer the case. There are caveats you need to be aware of in order to take this deduction. Your home office needs to be a separate room of your home. It should also be used exclusively for your business. If you set up a desk in your den but you also use the den to watch television you do not qualify for the deduction.
A discussion of taxes wouldn't be complete without touching on state and local income taxes. Some states don't levy an income tax (or tax only dividends and interest). Those states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. On the other hand, several states don't allow, or otherwise restrict, itemized deductions for gambling. Gamblers should be wary about residing in Connecticut, Illinois, Indiana, Massachusetts, Michigan, Minnesota, Mississippi, New York, Ohio, West Virginia, and Wisconsin.
Finally, if you have any complexities consider using a tax professional. We may be able to find deductions that you are unaware of and save you time, money, and headaches.
