Stern Advice: New tax angles for gamblers

WASHINGTON (Reuters) - In the waning days of 2011, the federal government has handed gamblers two gifts. The Justice Department cleared the way for states to start legalizing online poker and other online betting games. And the Internal Revenue Service agreed to a tax court decision that will allow professional gamblers to take big tax losses.

Does that mean you can now write off all those Knicks games and bar nights you and your fantasy league buddies attend? What about the Vegas sprees that support your habit? Sorry, not so much.

"The tax code is very very very... and I could add many more 'verys'... unfair toward gambling," says Russell Fox, a Las Vegas tax expert who prepares the returns of poker aficionados, horse bettors, slots players and more. Fox is an enrolled agent -- a special class of tax preparer that qualifies him to represent clients before the Internal Revenue Service.

Fox and other analysts do believe that the administration's new position will eventually lead to many more legal games and gambling opportunities. "Maybe five years from now, you're going to see a number of new games online; many of them have yet to be invented," said Michael Pollock, managing director of Spectrum Gaming Group, a research and consulting firm.

But whether the people who spend money on those 'opportunities' can actually cash in on the tax breaks that might be associated with them is another question.

The main limitation, from Fox's point of view, is that the IRS distinguishes between recreational and professional gamblers -- and only pros can take lucrative tax losses for their expenses. The bar is higher for a professional gambler than it is for a professional painter, babysitter, dogwalker or eBay merchant, Fox suggests. And only the pros can take tax losses for their expenses.

Here's what you need to know if you enjoy the games of chance and want to save money on your taxes.

-- You can win, but you can't hide. "Gambling winnings are always taxable income," the IRS notes. That includes the $250 you get if you call the final four right in your office NCAA pool, and the amount you win when the players in your fantasy football team have a good week.

-- Pros get big write-offs. If you are deemed a professional gambler, you can deduct more than you make, producing losses that can reduce your tax bill significantly. Here's how: You're allowed to take as much in gambling losses (the actual amount you bet and lose) as you won. Then you can also deduct your expenses, such as travel costs, tournament fees and the like. If that results in a gambling business income that is a negative number, you can use that negative number to reduce any other taxable income you may have.

-- Of course, there's a catch. It's very hard to prove that your gambling activity is a business. As recently as July of this year, the U.S. tax court disallowed the claim of a taxpayer who spent much of his spare time playing the slots, winning $25,534 in the process. He claimed betting losses of that amount plus expenses of $15,455. But the tax court agreed with the IRS's claim that he wasn't really running a gambling business, largely because he had a day job as an X-ray technician that supported him, and because he wasn't running his gambling business in a businesslike manner. The IRS has a checklist of behaviors that it looks at to decide if something's a business, and having fun is on it. If you really enjoy gambling and have other income coming in, and don't keep good records, you're probably just going to be considered a recreational gambler, even if you recreate a lot, says Fox.

-- Hobbyist gamblers don't get the same breaks. If you win a bunch of money, but aren't a pro, you can only deduct your losses up to the amount that they zero out your winnings. And they appear in different places on your tax return, so anyone who doesn't itemize their deductions will lose out. You still have to take the income as taxable, but you'll lose the deductions.

-- The fantasy leagues are still operating in the grey. The good news for people who field their own fantasy football, basketball or baseball teams is this: It's usually legal to do so. The law, which regulates online gambling -- the Unlawful Internet Gambling Enforcement Act of 2006 -- specifically carves out fantasy leagues as a protected activity. But Florida has outlawed fantasy leagues. And whether they are businesses is a whole other question that doesn't seem to have been tested. Some fantasy players are getting 1099 forms listing their winnings. That enables them to reduce that taxable income by the amount they bet or spent on participating (as long as they don't create a loss.) But proving you are a professional fantasy sports player? "I seriously doubt it," says Fox. "You have to prove it's your livelihood, and that's hard to see."

-- Some states are better than others. Some states disallow gambling losses, or subject them to their state's alternative minimum tax rules. According to Fox, if you've got gambling income and losses, you probably don't want to be from Hawaii, New York, Ohio, Wisconsin, or a handful of other states, because they have various rules which either disallow gambling deductions or subject them to alternative minimum taxes, or add extra taxes onto gambling businesses. Of course Nevada's kind to those who play (or work) at gambling, so living in Las Vegas instead of traveling there may always be an option. At least you'll cut down on travel expenses.

(The Personal Finance column appears weekly, and at additional times as warranted. Linda Stern can be reached at linda.stern@thomsonreuters.com; Editing by Gunna Dickson.; Linda Stern tweets at www.twitter.com/lindastern.; Read more of her work at blogs.reuters.com/linda-stern)