Tuesday, September 6, 2005

Loose change

Feds call for brand-new deal on all those poker winnings

Government works on improved system of withholding for popular tournaments.

By Albert B. Crenshaw / Washington Post

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As gambling in general and poker in particular spread across the land, here's some advice for neophyte players: Not only do you gotta know when to hold 'em, know when to fold 'em, you gotta know how to put it all on your tax return.

Gambling winnings, as most people know, are taxable income. But gambling losses, as many people don't know, aren't necessarily deductible. And the widely held assumption that you simply subtract your losses from your winnings and report only the net income, if any, is not the way it works.

In fact, the taxation of gambling -- or "gaming," as the Internal Revenue Service calls it -- is structured in an unusual "heads the government wins, tails the taxpayer loses" way. And because of that, a person who loses as much as he wins can sometimes end up owing higher taxes.

One of the few things going in the gambler's favor, at least until recently, is the difficulty the IRS has in tracking that income. Now the agency wants to change that.

"It's time to take a look at poker, which has become very, very popular, and see what sort of guidance we need to be starting here," IRS Chief Counsel Donald L. Korb said last week.

The first step, he said, will be to work out an improved system of withholding rules covering poker tournaments, and later on, perhaps broadening its reach.

Right now, the agency's reporting rules are not designed with poker in mind.

In general, IRS rules specify that the payer of your gambling winnings must send you a Form W-2G only if you win $600 ($1,200 from bingo and slot machines, and $1,500 from keno) or more and your winnings are at least 300 times the amount of the wager. In addition, if you win more than $5,000, the payer may be required to withhold 25 percent of the total -- and if you don't give your Social Security number to the payer, withholding is 28 percent. The IRS needs to decide, among other things, where poker tournaments fit in this scheme.

The current rules work well for horse racing, lotteries and similar high-payoff games, but "I can't imagine an instance where you would get (a W-2G) from poker," said Jeffrey Kelson, tax partner at the accounting firm BDO Seidman LLP in New York.

But just because the payer doesn't report the income doesn't mean the gambler doesn't have to, Kelson cautioned. He said he has found the IRS increasingly doing "root canal" audits in which the taxpayer is required to account for every bank deposit. These and other tactics can enable the IRS "to stumble over your gambling winnings," he said.

So, if you win and want to avoid trouble, you'd better include the money on your return.

In 2002, the most recent year for which figures are available, 1.5 million taxpayers reported total winnings of $18.7 billion, while 906,000 taxpayers reported $11.8 billion in losses.

IRS rules require you to report both -- not the net after subtracting your losses or other costs, but all of it. You put the winnings on a specific line on the front of Form 1040 -- it was line 21, "other income," for 2004 returns, though forms may change from year to year -- and that results in your total winnings being included in your gross income, and ultimately your adjusted gross income.

You enter your losses separately as a miscellaneous deduction on Schedule A.

This arrangement has several unhappy consequences for taxpayers.

First, if you don't itemize deductions, you pay tax on all the winnings and get no offsetting write-off from your losses.