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Posted by John H. Fisher on August 6, 2007, 10:33 pm
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> webmas...@onfirebikinis.com wrote:
>> Recently the IRS notified me that they changed my 2005
>> return. They took my gambling winnings of $60,000, which I
>> had indicated on line 21 (Other Income), and decided to call
>> this self employment income. The result is a new tax bill
>> of $8,000.
>>
>> IRS specifically states in their tax guide that gambling
>> income is to be stated on line 21. Thus, how can they now
>> justify calling this self employment income when I did
>> exactly as they reference in their tax filing instructions?
> After thinking about this some more, the questions are how
> did you win $ 60,000 and how much earned income did you have
> from your stated oddupation?
>
> The IRS has a fairly sucessful history of fighting claims
> of "Professional Gambler" as an occupation. There are no
> professional Lottery, Keno, Slots, or Craps players. But
> there are professional Blackjack and Poker players. In the
> latter two, you would have expenses to get to and stay at
> casinos - unless you were playing at home on the Internet
> or even worse running the game at your home.
>
> Without a full understanding of the facts, I suspect you're
> going to need a tax professional with audit experience!
>
> Adams' Rule #1: NEVER represent yourself before the IRS.
I suspect the "winner" did not qualify the type of income
when reporting it on line 21. In the case of gamblers, I
don't know of ANY who can reasonably expect a gain from such
employment. It MAY be possible to do it but I would expect
a challenge in every instance. Gamblers are losers. I'd
think of it as a hobby (reported as gambling winnings on
Line 21) and report the expenses (up to the amount of the
winnings) on Schedule A of the tax return. In my practice,
I have a great many clients who spend much of their time in
the casinos all over the country. Very rarely do I run
across anyone who has profited in the course of a year.
There are NONE who do so year in and year out. In most of
the cases, losses eat up the gains. "Generally, your
activity is considered a business if it is carried on with
the reasonable expectation of earning a profit.) IMVHO,
there can be no reasonable expection of earning a profit, no
matter how much time and effort is afforded such pursuits.
In the case of seniors, there could be a double/triple
whammy even if they had lost every penny of their winnings.
This occurs when they don't have enough deductions to use
Schedule A. In that case, they must eat the loss. Even if
it is a loss, reporting the win often results in the
taxation of Social Security benefits. Another consequence
could be that, if they are claimed as a dependent on the
return of others (even though the overall loss might exceed
Social Security Income and Winnings) they must claim their
own exemption and those who actually support them lose it.
Here's some IRS guidance:
"Business or Hobby? Answer Has Tax Implications
Fishing, Gardening, Golf, Sewing, Woodworking, Horsemanship,
Scrap Booking, Stamp and Coin Collecting, etc.
The IRS isn't trying to spoil your fun but if your favorite
activity makes a profit every year or so, there may be tax
implications that surprise you.
What is a hobby? Hobbies, also called not-for-profit
activities, are those activities that are not pursued for
profit. What is a business? Generally, your activity is
considered a business if it is carried on with the
reasonable expectation of earning a profit.
If you are not sure whether you are running a business or
simply enjoying a hobby, here are some of the factors you
should consider:
Do you run the activity in a businesslike manner?
Does the time and effort you put into the activity
indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances
beyond your control or did they occur in the start-up
phase of the business?
Have you changed methods of operation to improve
profitability?
Do you or your advisors have the knowledge needed to carry
on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can you expect to make a profit in the future from the
appreciation of assets used in the activity?
An activity is usually considered a business if it
makes a profit during at least three of the last five
tax years, including the current year.
An exception is breeding, showing, training or racing
horses. Such activity is presumed to be a business if it
makes a profit during at least two of the last seven years.
If you are conducting a trade or business you may deduct
your ordinary and necessary expenses. An ordinary expense is
an expense that is common and accepted in your trade or
business. A necessary expense is one that is appropriate for
your business.
Losses from a not-for-profit activity (hobby) may not be
used to offset other income. It is possible to claim some
deductions for hobby activities as itemized deductions on
your Form 1040 income tax return. However, there are
special rules and limits to the deductions you can claim,
and those deductions may not exceed the gross income from
your hobby.
Still confused? More information is available on the IRS
Web site at IRS.gov. A good resource is Publication 535,
Business Expenses, found on the web site or by calling
800-TAX-FORM (800-829-3676)"
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