Good News for Last Minute Tax Filers

JUST A REMINDER:  This isn't a real post -- it's just a note to let you last minute tax filers know that you've been given a  break. Your tax returns are not due today, April 15, after all. Most of us have until April 18 this year to get our returns postmarked or electronically filed because Emancipation Day falls on a weekend this year.

Here’s a short explanation as to why:

• Emancipation Day in Washington DC is normally observed on April 16.  It is a legal holiday celebrating signing of the Compensated Emancipation Act that freed slaves by Abraham Lincoln in 1862
• However, April 16 falls on a Saturday this year and gets pushed back the nearest weekday (April 15)
• So, this year April 15 is now made a legal holiday.  Happy Emancipation Day, everyone.
• Public employees are given the day off so no one will be at the IRS to process your taxes today, Friday, April 15, 2016.
• Tax day now gets pushed back to the next weekday – April 18.

Those in Massachusetts and Maine get their date extended to April 19 because April 18 is Patriots’ Day.

So, put off putting it off, and get it done this weekend.  And if you can't, be sure and file your extension by April 18 to avoid late filing penalties if all those big hand pays you got in the casinos this year cause you to owe. 

Gambling with your Taxes

It’s that time of year again. Less than three weeks to go until the dreaded April 15 tax deadline for 2015 arrives. Less than three weeks to go to figure out what to do with that collection of W2G forms the casinos gave us for all those many hand pays we had last year. (Ha Ha) Less than three weeks left to figure out if there is anything we can do to deduct any of those losses our casino win/loss statements say we had for the year. It’s a little late to start planning, and we vow we’ll do better keeping records for 2016, but in the meantime we need to know what can we do now to minimize that tax hit.

Not much, I’m afraid. Part of the problem is the tax laws as written do not treat everyone equally. If you’re a young person just starting out or an older person living on your social security checks, you are NOT going to pay the same amount of tax on the same amount of income as your middle age, middle class neighbors. You will pay on more of what the machines gave back to you and you will be able to deduct less of what the machines kept than those neighbors. And those middle aged, middle class casual gamblers will pay more than the high rollers will on their big wins.  Fair? I don’t think so. But it’s the way it is. And it’s part of what makes taxes hard to do.

The inequity in the law stems from the fact that ALL income from any source is taxable (unless specifically excluded by law) and only SOME expenses of earning income from various sources is deductible — and usually, only if you are able to itemize.

Itemizing, what is itemizing you ask.

OK, to put it simply, we all get a deduction on our 1040 forms on line 40 for an amount of income that varies based on our filing status. For single filers under 65 the amount is $6,300 this tax year, but if they are single parents or are caring for other qualifying relatives and meet the requirements for Head of Household filing status, it is $9,250. Married couples filing jointly get a deduction of $12,600. (There are slightly higher deductions for filers over 65 or legally blind - see the instructions.) Filers who chose to use these figures are not itemizing. They are deducting a standard deduction instead of itemizing.

Other taxpayers have expenses that the law allows deductions for, and if a taxpayer has more of these deductible expenses than their standard deduction, they can choose to deduct that amount instead. These deductions are figured on Schedule A. The most common itemized deductions are home mortgage interest, property taxes, charitable contributions, limited unreimbursed business expenses and limited casualty and theft losses, and gambling losses (up to the amount of claimed gambling winnings.) The middle class, middle aged, and middle income and the wealthy filers will usually be able to itemize. Young people just starting out and elderly taxpayers who no longer have mortgages and/or are over 65 usually can’t, though some can. The wealthy may have some of their deductions limited, but they will usually have no trouble exceeding the standard deduction amount. But the bottom line is, some people who won $3,000 gambling in a casino will have to pay tax on all of it (because their standard deduction is more than their itemized one), some will pay tax on an amount equal to part of it, and some will pay no federal tax at all on the same $3,000 (because their itemized deduction were already more than their standard deduction.)  And most, but not all, will pay state tax on the money too.

Here's an example.

Lets say in 2015 you got a $3,000 hand pay playing the slots. And let’s say that you made another $2,000 total on your winning casino trips and that you lost $1,800 on your losing trips. How much of this does the government know about? Probably only the $3,000 from the hand pay. They know about that money because the casino sent them a copy of the W2G they gave you when you had the win. The government computers are programmed to compare the amount of gambling income you report on line 21 of your 1040 with the W2G totals they get — just as they compare the wage total you report on line 7 with the W2 total sent in by your employers. And, just as some people “work under the table,” some gamers “gamble under the table.” Not all income people have is always reported and taxed.

Most mail “audits” are not real audits at all. They are computer generated notices of discrepancy sent because your figures reported on your return don’t match the amounts reported to the IRS by the payers. Whenever there is a discrepancy the government sends out notices of proposed changes and gives the filer the chance to agree and pay or to disagree and explain. So many filers incorrectly report only their W2G totals as gambling winnings, and if nothing else shows up to “red flag” their returns, they are never questioned or charged for underreporting their income. These gamblers are gambling they can beat the system by claiming only income reported to the IRS.

But this isn’t what the law actually requires us to do. By law ANY income we have is taxable unless specifically excluded by law. So if you have a $3,000 W2G and you had $2,000 of other winning sessions besides, IRS wants you to have $5,000 on line 21, the line for other income. Will you hear from them if you claim only the $3,000 shown on the W2G? Probably not. Not unless there is something else suspicious about your return. If there is, and if there is a real audit on any issue where you or your preparer  have to meet with an agent with your books and records, you can bet that the $3,000 of gambling winnings will be addressed also. Because, after all, how likely is it that that was your only gambling activity for the whole year - one visit, one win - I don’t think so. Is there a chance you will ever be called in to the IRS offices and audited? Probably not. But the more money you win gambling, and the more deductions you claim on Schedule A, the more likely it is. Time is money, and the government agents will spend their time where there is more money to be collected easily.

If you read the IRS literature, not only do you have to report all the income on your W2Gs, you also have to report all your gambling winnings not shown on W2Gs. Where would the IRS get that figure? If you are audited, they will ask to see your gambling diary. You say you didn’t keep one. Well then, IRS will make one up for you…with any indication of wins from any sources they have including your bank records and casino win/loss records, and your testimony about how often you play and how much you’ve won during any of those trips. They will probably look at everything they can for the past 3 years, not just the year in question. And guess what, they will NOT do the same for your losses. YOU are required to produce records of your losses to deduct any of them.

We are told all about Gambling Diaries and Record Keeping in Revenue Procedure 77-29. Yes, that bit of tax guidance was written almost 39 years ago in 1977. It has been interpreted in the courts, but it has not been rewritten in all that time. There are proposed changes being discussed, but no change has been made yet. Extracts from Rev Proc 77-29 can be found in IRS Publications 525 on Miscellaneous Income and Publication 529 having to do with Miscellaneous Deductions or the Revenue Procedure itself can be read on the internet. Basically you slot and table game players are expected to keep a record anytime you gamble — when and  where and who you were with that can confirm what you’re saying along with supporting information like cancelled checks and ATM receipts, bank deposits and withdrawl statements, casino win/loss statements, and machine information. And it must be contemporaneous - you can’t wait until IRS asks for your diary to write up one. 

If you have good records, you can deduct losses on your 1040 as a miscellaneous itemized deduction on Schedule A, but only up to the amount of your reportable winnings. If you do not have good records, you can not. So in this example with the $3,000 W2G and the $2,000 of other winnings - $5,000 total - you could claim the $1,800 in losses with good records. If you had $5,000 of winnings and $6,000 of losses, you’d be limited to $5,000 of deductions. No more losses can be deducted than the winnings you include.  

Which brings us to the biggest mistake gamblers make on their returns - netting their wins and losses.  It probably seems logical to you that if you won $5,000 gambling during the year, but you lost $1,800 on other trips, that when you file, you could merely report $3,200 in wins on the other income line, line 21,  of your return. You’d complain about having to do it, but it would seem fair and logical to you. And with these figures, you’d never hear from the IRS (probably) or ever know you’d done anything wrong because you would have reported MORE gambling income than your W2G showed. On the other hand, if you won $5,000 gambling and lost $2,800, and you netted your wins and losses and showed $2,200 on line 21, you WOULD hear from the government because they were told you won $3,000 on the W2G and your return showed you won $2,200. Do NOT ever net yearly wins and losses. Always report all your gambling wins on line 21 of Form 1040, and if you are able to itemize, include your allowable gambling losses on  line 28 of Schedule A. If you can’t itemize, well, too bad.

What does this teach us? It teaches us that whether you plan to follow the IRS reporting rules or not, if you do not report at least as much on line 21 as your W2Gs show, you’ll be in trouble for underreporting your gambling income. No maybe’s about it. If you report as much or more on line 21 as your W2G total shows, you will probably get lucky and never be contacted by the IRS because you didn’t report the rest of your income. You can decide for yourself if you are breaking the law. 

It’s not up to me to make judgements. That’s up to you and your conscience. I just state the facts; you must decide for yourself what you’ll do with them.

If you are interested, there are some blog posts about taxes from last year about this time.  I also have a book, Don’t Gamble with your Taxes, that you can obtain through Amazon with more examples and with tax information for professional gamblers. IRS has free publications that you can read on line or have mailed to you. The Revenue Procedures and Regulations that professional  tax preparers study are also free on the IRS.gov web site. And there are a lot of people who will do your taxes for a fee, and inexpensive software you can buy to do it yourself. We have many choices when we file …  Just make sure to get it done by April 15 - or file for an extension by that date if you need more time,  And whatever you claim you won gambling last year, do not fail to show at least as much on line 21, Form 1040, as your W2Gs show. If you don’t, you are asking for trouble, and, believe me, it won’t be fun.

Bad News for Grandma and Other Gamblers on Social Security

Grandma might be in trouble with the government and not even know it. Her favorite gaming hobby might turn into a horror when she starts to draw Social Security each month. That could happen as early as age 62 if she opts not to wait for her full benefits at 66. Some people don’t even realize Social Security can be taxable. Not everyone makes enough other money to have to pay tax on those monthly payments. But for those who do, the IRS can tax up to 85% of their benefits. Combine that with her taxable gambling wins, and she might just have to rethink how much fun she can have in the casinos once those benefits begin.

Gambling is a favorite pastime of the geriatric crowd. Visit any casino in the late morning or early afternoon hours, and you’ll see banks of blue haired ladies and distinguished looking grey haired men playing the slots. The casinos are happy to have these older gamblers visit and spend their Social Security checks playing the games. They offer all kinds of incentives like free bus rides, and free play, and reduced-price buffets, and bingo and other entertainment for the over 60 crowd to get them in the door. Casinos like the older gamblers. The older gamblers like the casinos. The games are easy to play, and they sometimes get to win a little money. There are nice people to interact with socially, and it’s all more fun than vegging out in front of the TV all day. Too bad the government expects these players to keep track of what they win and pay tax on it.

The tax law is not very kind to its older taxpayers. Sure people over 65 get a higher standard deduction, but that’s about the only break they get. One aspect of taxes for older filers that really hurts sometimes is the possibility that they may have to pay tax on up to 85% of their Social Security benefits. Ouch! That hurts.

There are worksheets in Publication 915, in the 1040 instructions, and in mailings from SSA to determine how much of what SS recipients draw is taxable. I have a book which will be coming out soon on Gambling and Taxes that will go into all of it in detail. But I want to hit the highlights now for those who may have parents and grandparents who filed extensions this year and need to get started on their returns. This will not cover everything, because people on Social Security could have many other things complicating their tax returns: IRA and annuity distributions, working as consultants rather than employees, having income over the thresholds that causes a phaseout of itemized deductions and reduced exemption amounts, repayment of part of their benefits because they are still working and haven’t reached full retirement age, etc. Because we’re focusing on gambling income, we’ll leave all that for another day. We don’t want to go into such detail that we can’t see the forest for the trees! Just taxes on Social Security and gambling today.

It requires completing an 18 line worksheet to see how much of your Social Security income is taxable. But there’s a quick calculation you can make to see if you need to do the worksheet. It’s easy. You take half of the amount in box 5 on your (and your spouse’s) SSA form, add it to all the other income from the front page of your 1040 (plus tax exempt interest if you had any), and compare the sum to the base amount for your filing status. 

That base figure is $25,000 if single, head of household, or married filing separately and not living with your spouse at any time during the tax year. It is $32,000 if you are married filing jointly. And it is 0 if you are married filing separately and lived together at any time during the year. If half your Social Security and that other income exceeds these base figures, part of your Social Security will be taxable. If not, it will not be taxable. If the quick calculation is more than $44,000 for people married filing jointly or more than $34,000 for everybody else, the taxable portion may be up to 85% of your benefits. The worksheets in the instructions and Pub 915 will figure the exact amount for you.

Here’s an example of a hypothetical couple on Social Security to illustrate. We won’t work through the 18 line worksheet twice here, but I’ll give you the results. You can see the completed worksheets in the book when its available. Or you can print out your own worksheet now off the web to run these figures through. In this illustration the husband draws $21,000 Social Security and a $30,000 fully taxable pension. The wife draws $11,000 Social Security and a $5,000 taxable pension. Their only other income totals $1,000. Together they had $7,500 in gambling winnings and $8,000 in gambling losses. When  you work through the Social Security worksheet and the tax calculation with these figures, you will be shocked by the results. Here's what you will find.

(a) Without any gambling winnings, the couple would pay tax on $11,000 of their $32,000 SS benefits. With an additional $7,500 of gambling winnings (whether or not they can itemize and deduct any losses), they will pay tax on $19,175 of their SS benefits! That means instead of paying tax on 35% of their benefits, they are going to be paying tax on 60% of what they drew.

(b) This taxable Social Security is going to raise their Adjusted Gross Income (AGI) from $47,100 to $62,675. Higher AGI can cause a lot of problems for people who could lose many tax credits, deductions, and benefits above certain AGI thresholds. Some state tax issues too. We’ll ignore that now, but keep in mind there could be other problems for some filers. At a minimum they’ll be figuring federal tax on $15,575 more income — the $7,500 gambling winnings and the $8,075 additional Social Security that is taxed.

(c) Taking the standard deduction instead of itemizing means the $8,000 loss is deducted nowhere on their return. But most likely this couple won’t be able to itemize. Probably their house is paid for, or they have downsized into an apartment, and they don’t have enough deductions to exceed their $14,800 standard deduction.

(d) Subtracting the $14,800 standard deduction and two personal exemptions totaling $7,900 from their Adjusted Gross Income leaves this couple with $24,400 of taxable income to look up in the tax table in one case and $39,975 in the other.

(e) The tax on $24,400 in 2014 was $2,756. On $39,975 is was $5,089. So our couple is paying $2,333 more in federal taxes because of the way our tax laws are written. 

This is so unfair in so many ways. 

It is no wonder that many gamblers ignore reporting their gambling wins and losses when they aren’t reminded of them by getting a W2G. It’s no wonder that their tax preparers don’t want to probe too deeply into their elderly clients’ casino activities when they file the tax returns. They know the law isn’t fair to the elderly. Nobody wants to pay a tax that they don’t think is fair. (Nobody wants to pay tax. Period. But especially not an unfair one.)

Someone really should lobby Congress to rewrite these laws. Allowing netting of wins and losses at the end of the year would solve the whole problem. But we can’t change things, I’m afraid. Reform will never happen because of the revenue the government would lose changing the law. So, I guess we’ll just have to do the best we can to keep our parents and grandparents in compliance without digging too deeply into their finances and hope they still have enough money left after the big tax hit to have a little casino fun every now and then.

Making Money on YouTube

Are you one of the thousands of entrepreneurs who upload videos to YouTube each week hoping to make a little extra income monetizing your favorite hobby? Do you have dreams of turning that activity into a thriving business that could bring in enough money to live on? You’ve seen articles and ads about how much money is made by some Video Stars. Wouldn’t you like to earn a part of that too? Sure you would. But you might be surprised how little of the money earned from internet videos and ads on YouTube the creators actually get to keep. 

After my husband read my last blog entry about You/Tube and business taxes, he found an article on Yahoo which he shared with me. It focused on how little of the money these YouTube channels bring in that their creators actually get to keep. Joe found it interesting and thought those of you who read this and those of you who entertain us with slot videos might find it helpful too. You can compare your reality with what might possibly be internet fiction by the bloggers yourself. Read the August 3 article at http://finance.yahoo and draw your own conclusions.

If you are posting videos on line to make a little money from YouTube, you already know they are keeping a pretty big share of the income you generate. According to what we’re told, YouTube takes a 45% cut of any ad revenue earned by each of your videos you post. And that’s before taxes and your own operating and editing costs.  I have seen companies on line offering a 65-35 split if you sign with them, so a 45% rake doesn’t really surprise me too much. 

The income figures do surprise me, however. They seem inflated to me. I can’t believe videos generate  anything near the money the articles say these stars make. Not for practically all of you. YouTube’s top filmer called PewDiePie - I’ll call him PDP - supposedly earned $7.4 million last year according to Yahoo. But  Statsheep, a site that generates statistical estimates about YouTube channels, estimates that PDP actually earns even more. They say his earnings are closer to $10.5 million each year based on his recent traffic. Just for making jokes about video games!

How much does he get to keep?  Here’s their math.

Total Revenue: $10.5 million

After YouTube’s 45% rake:  $5.775 million

After taxes at 30% on his part: $4.0425 million

Net Income: Roughly $4 million.

Unbelievable! But before you buy a videocamera and quit your day job, consider what it costs to become a YouTube star. Turns out you can be one of the most famous people on the web and still barely get by. 

The Yahoo writer also ran the numbers on Olga Kay, another well know video star. You can also read more about her in a New York Times article “Chasing Their Star on YouTube.” Olga films self-deprecating monologues on female American life.  She has earned $100,000 to $300,000 in each of the last three years and has a million subscribers. She makes 20 videos a week, all of which are filled with ads through Google’s automated YouTube partners program. They say she gets about $7.60 per 1,000 ad views, down from $9.35 in 2012 according to Tube Mogul, which buys and sells video ads. Ads are not run on all YouTube videos. Articles claim a video creator will earn roughly $2,000 for every million views. (And then YouTube takes its 45% cut. And then IRS takes its cut of the remainder.)

Olga Kay has business expenses which she deducts. She claims to  spend $500 - $700  a week on editing costs. That figures out to be $25 - $35 per video. She must have to pay someone to do her editing for her. If she earns $100,000 a year, she might be looking at as little as $13,500 annually after YouTube’s cut, editing expenses, and taxes according to her numbers below. If she’s paying that much to have her vids edited, you guys who film slot games might want to consider branching out and making a business of editing other people’s films for a living as well. 

Here are Olga Kay’s numbers.

Total Revenus: $100,000

After You/Tube 45%: $55,000

Minus editing costs ($500 per week x 50 weeks): $25,000

After 30% taxes: $38,500

Net income: $13,500.

Jason Calacanis, a well-known Silicon Valley entrepreneur who was part of YouTube’s professional partners program said in the write-up that to make 10 videos he would spend $25,000 to $75,000 in costs before a dime was earned in advertising.  I can’t imagine it taking that much money, but what do I know! I guess music videos might cost a lot if they were well done and creative.

Is any of this anywhere close to what your YouTube channels earn you? Do any of these figures for income or expenses seem reasonable? I find it all very hard to believe.  And yet, I’ve met a personable young girl, the former lead singer of my son’s band in LA , who makes a lot of money on YouTube talking while she plays video games and such. She’s cute as a button and goes by the user name Misses Mae, and I’m sure she would be happy to have you visit her site and subscribe. According to  my son, she has been doing this for about 3 years. She said the first 100,000 subscribers threshold took her a long time to reach, but after she crossed that threshold, the numbers very quickly doubled and are still growing.

He also tells me YouTube has studios, one in Playa del Rey in Los Angeles, which are more or less a cross between cable access and studio production that some of their filmers use. The Young Turks even recorded their news program at Playa del Rey while their own studio was being built. Misses Mae YT doesn’t record in the YouTube studios, but for most filmers, as your numbers grow, so does your access to recording time in the YT studios.

How do you get your money when you post on line? I’ve been told that some filmers work directly with YouTube and are paid through AdSense which does not take a cut of your earnings or charge PayPal fees. Others work with Multi-Channel Networks. The MCN are middlemen who promote your channel (among other things.) YouTube/Google pays the Network which takes a cut anywhere between 20-40%, and deposits the remaining amount in the videographer’s PayPal account (minus fees.)  Which is the better way to go? I don’t know. Ask someone who does this to make a little money. Start a SlotFanatics thread to discuss it if you like. Their members should be people who know.

Well, OK, I have to confess, after reading these articles, I now realize that I need to modify my tax advice in the last blog. I had NO idea it cost so much to make these films. If you are paying $25-$35 a film like Olga Kay, you definitely DO need to deduct expenses on your Schedule C or C-EZ. Heck, you could even end up with a business loss if you have to pay that much in expenses, and you don’t have much in the way of subscribers or income. Maybe your loss could reduce your AGI and countract the inflated AGI problems caused by your gambling wins.

,

So, lets hit the business tax highlights in review once more. Your income will be reported to you and to IRS on a 1099-Misc form. The 1099-Misc you receive should have the fees you paid YouTube and/or your MCN subtracted already. If they haven’t been subtracted and the pre-fee amount is shown on the 1099, you should subtract what your business records show you paid in fees yourself as an expense on Schedule C or C-EZ. If you’ve been charged PayPal fees that haven’t been subtracted already, you should deduct them too. Remember to keep organized complete business records and receipts for everything you spend to earn this money. to back up your deductions. (But not the records of the cash you run through the machines gambling. You keep those records too, but you keep them in your gambling diary for Schedule A, not for Schedule C.)

I hope, you are all doing your own editing, but if not, deduct as a business expense what you pay to have your vids edited. And if you are really making big money - bigger than I suspected before - you might actually want to consider  taking  your other  business deductions as well even though it is a lot of work. Depreciate your camera and computer, and write off the editing software costs. Keep a mileage log for the business travel between casinos where you film and from your tax home (your usual place of business) to out of town locations where you have occasional business activity. For most of you it will be worth hiring a tax preparer if you are spending  that much money and generating that kind of income.

If you have a different experience with your YouTube business than my two articles describe, or if you have suggestions that would be helpful to other readers, feel free to comment here - or send me an email with your thoughts and ideas. I’m always eager to learn more from people who have first-hand knowledge of how it all works. And if you need help with the tax forms, I’m happy to help you there too if I can.

To close, let me give a very special “thank you” to a very special YouTuber who explained to me how MCNs and AdSense work!  I appreciate you very much.  :)

YouTube and Taxes

There are hundreds, no, thousands, of people who post videos on YouTube every year.  If you are reading this, you are probably one of them. One plus of engaging in this activity is that YouTube/Google will send you a check every now and then. They’ll give you a share of the income they generate running ads at the start of your videos. The amount you earn is determined by a secret formula based on the number of views, and likes, and subscriptions your films generate. What you might not have expected is that if those checks total $600 or more each year, YouTube/Google will also send you an IRS tax form called a 1099-Miscellaneous (1099-Misc) so you’ll know how much business income from filming and internet publishing you have earned. This is money you have to report when you file your tax return for that year. Bummer!  IRS takes the fun out of everything.

These payments from YouTube/Google are NOT gambling income. It doesn’t matter for your video filming business whether you won or lost or got a W2G or no form of any kind for any film you show the rest of us. Your gambling wins are reported on line 21 of your 1040, and your losses (up to the amount of your winnings) are deducted on Schedule A if you are able to itemize, just the same as they would be if you hadn’t ever recorded the film. This income is different. The amount reported on the 1099-Misc is NOT income from gambling. It is income from publishing films of your games on the internet. The business code you will be using is the one for information services which includes internet publishing: Code 519100. (You can find the business code for any business venture at the end of the Schedule C instructions.)

The payment you earn from YouTube/Google is reported as business income — not as gambling income — in the tax year YouTube/Google sends you the check. It is reported on Schedule C or C-EZ and is carried from that schedule to line 12 of your 1040. (And also to Schedule SE. - I’ll explain that later.)  

Some of you don’t want to think of posting on YouTube as a business. You don’t want to keep records. You just want to enjoy the activity. I’ve read threads on SlotFanatics saying as much.  Wise people, these YouTubers.

OK. That’s no problem. This doesn’t have to be hard. if that is how you feel, and you don’t want to keep records and deduct expenses of earning your YouTube checks, you don’t have to. (I wouldn’t either.) Use Schedule C-EZ instead of Schedule C. Report the amount from your 1099-Misc in Part II, line 1. Put 0 on line 2 for your total expenses. This difference from line 3 (which will be the same as line 1) goes from this form to line 12 of your 1040 (and to Schedule SE to calculate self-employment tax and the line 27 adjustment). That’s it. 

Except, of course, unless you have another self-employed activity that you earn money at. (IRS can never tell us anything without an “except” or an "unless" to complicate things!) In that case you have to file a Schedule C for each of them - not C-EZ. But if you have that problem, you probably also have an accountant doing all this for you.

If you don’t deduct any expenses, there is nothing to this. No record keeping requirements even, because, since you are not deducting your business expenses of filming, YouTube/Google has kept the only record you need, the record of the income they paid you.

Now, if you WANT to deduct expenses that your business incurred, that’s a different story. Everything between the $$$ is tax talk that most of you will want to ignore. Feel free to skip to the summary at the end.

$$$

Business expenses are deductible for your video filming business, but you must be very, very careful to keep detailed records if you are going to write off your filming expenses. And to do this correctly, you’ll be keeping these records for five years, even if you give up the business before then. 

I am not saying this will be easy. I’m not recommending you do this. I’m just saying it’s legal, and I’ll help you all I can. But believe me, you are NOT going to want to do this. Not with the amount of income your business generates. There are only three areas I can think of where you MIGHT have tax write offs: depreciating your filming equipment, MAYBE meeting the requirements for home office deductions, and MAYBE mileage write offs between casinos on the days you film. I’ll share some very basic tax information on all three items, but, be warned, you’ll need to study and learn a lot more if you decide to do this, or you should plan to pay a tax specialist to do it for you. (And that may cost you more than YouTube/Google paid you.)

Let’s look at depreciation first. What makes this so difficult is that the type of assets you use in this filming business — cameras for instance — cannot be written off in the year you purchase them like some things used in business can. Assets like video cameras fall in a class called listed property. Pull up Form 4562 and its instructions off of the IRS web site. Just looking at this form is going to make you want to forget the whole thing.

 Listed property is reported in Part V on the back of this form. Listed property is given special attention by IRS. The business assets in this group are ones frequently subject to abuse. They are  items bought for use in a business that are very attractive and desirable to own, and items that you might like to have for personal use as well as for your business: cars, computers, video cameras - business assets used for entertainment, recreation, and amusement. Things you might buy for yourself and try to write off as a business expense. Things that IRS agents are going to scrutinize more closely than less attractive assets such as filing cabinets and the like. That’s why they have you LIST these things so they can look for them on your return in other years…unlike things like office furniture and backhoes that all get lumped together because there is little chance of abuse.

The next thing to notice about listed property is that you have to have records of how much of the use of this asset was for business and how much was personal use. If your business use is more than 50% (and will remain more than 50% over the entire 5 year recovery period), you’ll be using line 26. If it is less than 50% business use, you’ll be using line 27 — and in addition, you must recover your cost through straight line depreciation - not any accelerated method - if you might use that asset less than 50% for business any year if the recovery period. Discussion of various methods of depreciation and recovery periods is a whole other topic to cause you headaches.

Did I even tell you what a recovery period is? It’s how long the IRS expects you to be able to use an item in your business. This time period is different for different items - there’s a chart at the end of Pub 946 to give you the recovery periods of common business assets. The time periods are not even realistic sometimes. Who is going to use a computer for five years in a business in this day and age! But it is what it, is and you have to use the methods and recovery periods IRS says to use.

You probably have no idea what I just said. I’ve probably lost you already, and we’ve just started. I’m sorry this is so difficult. Feel free to decide to change your mind about taking business deductions at any time during this discussion! No one would fault you at all.

There are tables in the depreciation publications 946 and 583 to tell you what percent of the cost of your business asset can be written off each year of its recovery period depending on the depreciation method you are using. To make things even harder, you may be getting only a half year or a quarter year’s write off the first year depending on what month you put your camera in service in your business.  This is very, very complicated stuff. I cannot teach you depreciation in a computer blog - it would take a book, maybe a couple of books,  to do this right. Even then you might not understand. Look at the instructions to the form 4562. If it is gobbledygook to you, I’d advise you to just forget about deducting depreciation expenses. You probably don’t have that much income from YouTube/Google to offset anyway.  

The second deduction I want to just touch on and discourage you from taking is the home office deduction. Some people who run a business out of their home do it in such a way that they can write off some household expenses that are normally personal nondeductible expenses as business ones. To do this, their home office must be used exclusively and regularly as their principal place of business for that business. This allows them to deduct a portion of certain household expenses, and, of more value, to deduct travel expenses from the home office where they do their editing to the place they do their filming. 

The requirements for this write off are also very, very strict, and ANY personal use of that office at all causes it to not  qualify. If you so much as watch a friend’s YouTube video or a movie on Netflix in the office where you do your editing, you have not used that office EXCLUSIVELY for business, and the deductions will not be allowed if you are audited. Warning: businesses with home office expenses are frequently chosen for audit. You also get into issues of depreciation here too. If you use your computer in your business in your office, you find yourself in a catch 22 situation. If your depreciation schedule for your computer doesn’t show  100% business use (which is NOT going to happen — don’t be checking email or Facebook on it if you plan to say it does) you have automatically made your home office disqualify. If you own your home you normally deduct mortgage interest and real estate taxes on Schedule A. You’ll find with a qualifying home office you are expected to calculate the percentage of your home taken up by the office and allocate those deductions based on square footage between Schedules A and C. You are also allowed depreciation deductions that complicate your return if you ever sell your home. If you’re interested in learning more about home office deductions, read IRS publication 587. I think you’ll find this too is more trouble than it is worth.

The third write off is vehicle expense deduction. Vehicles used in business can be depreciated — but believe me, you don’t want to get into that. There is also a standard mileage rate than can be used in place of the cost of the car and all other expenses of operating it for business. (Things like gasoline, repairs, etc.) The standard mileage rate for this year (2015) is 57.5 cents per mile, up from 56 cents per mile in 2014. It goes up slightly every year, just like our living expenses do.

You are not allowed to deduct mileage to and from your principal place of business from your home on your tax return. Commuting expenses are not deductible. If you have more than one place of business you are not supposed to deduct mileage between your home and first stop nor between your last stop and home. However, if you have more than one place of business, you can deduct mileage for your trip between these two sites in the same day. The reason some people try to deduct business in the home expenses is really to get this mileage write off by conducting some business in that home office before driving to the other location where they conduct business activities. They sometimes forget minimal business use does't count. You office has to be your main place of business, not just another one.

I'll go out on a limb and opine that It appears to me that travel between two casinos where you film videos in the same day could be justified as a business expense, but not the travel from or back to your home. However, I am not a CPA or an enrolled agent, and the law does not allow me to give tax advice, so please don’t say I told you to do this. Read the IRS literature on business expenses, discuss the subject with your paid preparer, file as honestly as you can, and remember ultimately YOU are responsible for whatever you put on your return. Regardless of who advised you that you could or could not do something!  My advice, for what it is worth which is less than nothing, is forget about all the headaches this will cause and just report the income and don't mess with expenses. But don’t say I’m the one who told you so.

$$$

Back to the basics. We do need to talk just a little bit about Self-employment tax since both Schedule C and Schedule CEZ refer you to Schedule SE.  Self-employment tax is really Social Security and Medicare tax. When you work for someone as an employee, half of this tax is paid by your employer and half is withheld from your pay. (It’s frequently called FICA from the Federal Insurance Contribution Act.) When you work for yourself or when you are paid as a subcontractor, you pay both parts yourself. To make it easier to pay in, it is calculated on Schedule SE of your 1040 and carried to line 57  in the other taxes section.  You are given an adjustment for half the tax on line 27 since you are paying both parts.

There are two schedule C-EZs - a short one on the front of the form which almost everyone does and a long one on the back for special cases. There’s a flow chart to tell you which one to use. 

(There are two forms because there are special tax provisions in the law for certain categories of filers such as ministers and Christian Science practitioners, some members of certain religious orders, and certain church employees. There are also special calculations for people who have exceeded the Social Security threshold of $117,700. (This is the 2014 amount - it changes each year). Certain people with unreported tip income can’t use the simpler form. Also there is an optional method for people who don’t have enough Social Security coverage who are willing to pay in more - even with losses - to build up their earnings record. None of these will likely apply to you. Almost everyone will use the short Schedule SE.)

You do the arithmetic on the SE form to get the amount of self-employment tax to put on line 57 and to calculate the adjustment for line 27. Self employment tax gets added to your income tax when you file your return.

So, in summary, here's all you really need to know, Filming slot videos for YouTube is a business if you are getting paid to do it, but it is not a gambling one. Gambling wins and losses don’t matter on your filming business schedule. The simplest way to handle everything for taxes is report the figure from the  YouTube/Google statement on Schedule C-EZ and line 12 of your 1040. Figure your self-employment tax on the short Schedule SE for line 57 and the adjustment on line 27. And don’t worry about record keeping for filming and editing expenses if you aren’t deducting expenses.  

Report the wins and losses from your wagering the same way you always have. And do keep a record of your gambling wins and losses in a simple, daily gambling diary of some sort especially if you are able to itemize. Your casino win/loss statements by themselves will not be enough. They are supporting documents. Even the print out from the casino says you can’t rely solely on them. Ignore your gambling diary and your win/loss statements for your filming business — they’re records for your personal casual gambling, not for your business.  And if you need help with any of this, I’ll try to answer your questions if I can . 

Canadian Crossing Concerns

     If you are a Canadian who wins big (over $10,000) in the USA, you might be the subject of two currency transaction reports. One filled out by the US casino where you won the money for the IRS and one filled out at the border for the Canadian Border Service Agency (CBSA).

     Why, you ask?

     The first report is the Form 8300 filing required by Title 31 of the US code to circumvent money laundering and the funding of terrorist activities. It applies to aliens as well as to US citizens. How do I know that? From the instructions at 4.26.10.7.1(5) of the IRS document HERE. It indicates that identify verification for aliens or non-residents must be done by using the person’s passport, alien Identification card, or other document evidencing nationality or residence. The document used is recorded on the form, and the form is sent to the US Government to aid in its money laundering investigations.

     The second report is required by the CBSA. You can read their guide for yourself at CBSA. Here’s what it says:

     It is not illegal to transport money across the US/Canada Border. It doesn’t matter how much money you bring into Canada or how much money you take out of it. But there is now a requirement to report to a border services officer transactions totaling CAN$10,000 or more. It makes no difference whether the money is coin or currency, domestic or foreign, or whether it includes travelers cheques, bank notes or securities. If it’s more than $10,000 and it’s cash, you must declare it and complete Form E677.

     If the funds are not your own, you complete Form E667 instead. You cannot avoid the requirements by mailing the funds into Canada. The form must be completed and included with the item being mailed. Another copy is sent to the nearest CBSA office at the same time. Other postal requirements may exist. Nor can you avoid these requirements by sending the money by courier. If you fail to report monetary instruments greater than $10,000, your funds are subject to seizure and the assessment of penalties or forfeiture. Penalties can range form $250 - $5,000. 

     Canadians with questions can call throughout Canada at 1-800-461-9999. Outside of Canada call 204-983-3500 or 506-636-5064. 

     There are a lot of sites with threads discussing CBSA reporting requirements on the internet. Unfortunately many of these bloggers are making suggestions about how to circumvent the rules. Are they devious people? Or do they not understand the rules and the reasons for them? Why should you need to hide something legally won? Especially if it is recreational gambling winnings. Canada doesn’t tax recreational gambling winnings of its citizens - only a Canadian professional gambler’s business income is taxed by Canada.

     Not all of the ideas put forth on the web are bad. One writer had some very good suggestions. He suggested you document where the money came from - a letter from the casino, a picture of the winnings, a copy of your plane ticket, etc. He advised that you ask the casino to write you a check for your winnings rather than try to carry large amounts of cash across the border. He felt that the Canada Revenue Agency might contact you about the money, and if you couldn’t prove that is was recreational gambling winnings, they’d want it declared as taxable income. 

       Incidentally, don’t forget 30% is withheld by the US casinos from foreigners on large wins. If you are a Canadian citizen with winnings in the States, you may need to file a US 1040NR return to have overwithholding refunded at tax time. Take a look at my earlier post HERE that addressed Canadian gambling rules if you’ve forgotten.

Bank Secrecy Act - Why So Secret?

       Has this ever happened to you? Maybe you took a trip to Vegas and had a very, very lucky day. Maybe you won a $5,000 jackpot in a casino when you played that morning, and then hit another big $5,000 win when you went back that afternoon. Sure, you got W2Gs to file at tax time — but did you know that isn’t the only report the Casino sent to the IRS about your play? Did you know they also sent the feds Form 8300, a Currency Transaction Report (CTR), used to alert the IRS to possible money laundering or criminal activity? Of course you didn’t know that. Casinos don’t tell their patrons when they file these forms. Most people don’t know anything about Form 8300 or even about Title 31 of the tax code that requires the casino to file it. Title 31, also called the Bank Secrecy Act, is the part of the code, amended by the Patriot Act in 2001, that deals with the movement of illicit cash into, out of, or through financial institutions. And if a casino or bank sends the Treasury one with your name on it, they won’t tell you they did. It’s a secret!

       When Jill Waters was banned from Pauma Casino for life, the reason given by their gaming commission was her “intent to avoid tax reporting pursuant to Title 31”. Could this happen to you? Could you unknowingly trigger a Title 31 investigation by an act as simple and innocent as too large a buy-in or payout of casino chips at the blackjack tables or too big a jackpot win playing slots? When are these 8300 forms required, and what kind of information does the casino give the government on them?

       Banks and financial institutions have been filing CTRs (Currency Transaction Reports), Form 8300, for customers making cash deposits of $10,000 or more since 1970, along with Suspicious Activity Reports (SARs) for any amount that might suggest money laundering, tax evasion, and other criminal or terrorist activities. You can view this form yourself on irs.gov HERE. 

       Since 1996 casinos with annual revenues greater than $1 million dollars have been defined as non-bank financial institutions and have been required to comply with all the requirements of this law and file CTRs. Two years later in 1998 the requirements to file this form were extended to card clubs. There are card clubs in Los Angles currently being investigated by a federal grand jury this summer for failing to comply with these Title 31 reporting requirements.

       CTRs are required of “money handlers” like banks and casinos and car dealers who are paid $10,000 or more in cash for big purchases like automobiles. They are only required for large cash transactions. Credit cards and debit cards and checks don’t fall under that category. There’s a paper trail when you write a check or deposit one. Currency Transaction Reports tell the IRS about large cash dealings. They help IRS identify people who may have illegal income to hide. They often identify money launderers such as drug dealers or thieves or sports bookies taking illegal bets. They also direct the agency’s attention to honest business people who have done nothing wrong. And they also direct the IRS’s attention to gamblers with large bankrolls won or lost in the casinos who might not have gotten a W2G form for their winnings because they were playing table games, not slots. Not everyone who is the subject of a CTR has done anything illegal.

       CTRs are not required if the cash transaction is less than $10,000. Often they are filed for lesser amounts, however. Box “b” at the top of the form is checked when the report is sent to the IRS if the transaction is under $10,000 but seems suspicious. These are called Suspicious Activity Reports (SAR). A cash transaction of $9,999 would be an example of a suspicious transaction as would two transactions of $5,000 each within a short period of time. SARs are currency reports that are not technically required to be filed because the $10,000 threshold is not met, but which are filed anyway because it looks like the depositor is attempting to structure the payment or deposit in a suspicious way to avoid the government’s knowledge and to avoid the CTR filing. 

       The bank or casino is not required to tell you — and will not tell you — a CTR is being filled out if you don’t ask. If you do ask, they may feel that inquiry is in itself suspicious and file one anyway. Not all cash transactions for large money amounts are indicative of illegal activity or unreported income. Not all trigger an investigation. If you have a small business such as a restaurant or bar, for instance, you easily could have over $10,000 in cash to deposit when you visit the bank with your receipts at the end of the day. But if you are a gambler, and the casino reports large bets or winnings of $10,000 or more on a CTR when you play its table games, be prepared to have IRS auditors review your tax returns and possibly ask you to explain where the money came from, where it went, and how much of it is shown on your tax return at the end of the year.

       Title 31 regulations apply only to cash transactions of over $10,000: cash-in or cash-out. Cash-in transactions at a casino might include actions such as the purchase of chips, bets of currency, purchases of a casino’s checks, exchanges of currency for currency, including foreign currency — all for large amounts of cash, $10,000 or more.

       Cash-out casino transactions might include actions such as redemption of chips, advances on any form of credit, payments on bets, cashing of large checks, reimbursements for customers travel and entertainment expenses by the casino— again totaling over $10,000. 

       Multiple currency transactions are treated as a single transaction if they total more than $10,000 during any gaming day. Casinos also file suspicious activity reports for lesser amounts when it appears a customer structured their transaction to avoid CTR reporting. For instance breaking a $12,000 cash transactions into 3 transactions of $4,000 would be reported as a suspicious activity. For this reason many casinos record transactions as low as $3,000 by a customer and track them to see if there are other actions taken that might cause the patron to reach the $10,000 threshold.

       Minimal gaming is another type of suspicious activity relating to money laundering. In this case the patron puts large amounts of money in play, but gambles very little before cashing out. Money could be laundered by inserting currency into a slot machine or a change kiosk as well.

       Suspicious activities can involve two or more individuals handling the same currency bankroll. This is referred to as “agent activity” by the casino. Agent activity is suspicious because it allows individuals to structure their transactions below the $10,000 that would require a CTR.

       A CPA Joe Oprosko, claims in Indian Gaming on the web that a log is also kept for all cash-to-cash money exchanges in excess of $1,000, larger bills to smaller bills and vice versa. I was unaware of this, and have not yet found another source to confirm this,

       In his article he also gives some real-life examples of money laundering that took place in casinos and were reported to the IRS Criminal Investigation Unit. One involved a major drug dealer who played $100 dollar slots, wagering hundreds of thousands of dollars in order to receive a casino check and W2G to legitimize his income. In another example, a number of customers all bought chips below the reporting threshold and then passed them on to a single individual who cashed them in and received a casino check triggering the filing of a CTR making the transaction seem legitimate. Over a 12 month period, he was named on CTRs totaling $1.1 million dollars paid out, but not one CTR for money paid in.  There are many stories about money laundering HERE.

       If you have been following the news about the indictment of Dennis Hastert accused of structured cash withdrawals from banks and then lying to federal investigators about its purpose to pay a former student he had abused, you have a timely example of these issues. You can read the June 9 report from the New York Times HERE.

       To sum it up, lets go back to the Water’s sisters-in-law. They changed seats when they won their $2,040 jackpot and as a result were accused of evading taxes and were banned by the casino for life. Keep their story in mind when you gamble. Be aware that some casinos are so afraid of being fined for not complying with Title 31 requirements that they sometimes over react. And, most importantly, keep that $10,000 figure in mind and don’t do anything that might trigger a CTR or suspicious activity report if you can. 

Seat Switchers Banned For Life

Laura and Jill Waters -- Banned Gamblers

       Five years ago two middle aged gamblers Laura Waters (62) and her sister-in-law Jill Waters (57) won a $2,000 jackpot at Pauma Casino in Southern California. They also found themselves banished from the casino for life. In addition they were accused of money laundering and told neither of them would be paid the money they had won. Here’s what happened according to the players as reported by J Harry Jones in the San Diego Union Tribune.

       The two women frequently visited various Native American casinos, shared their cards, and split their winnings as many other couples do. On the evening of May 28 they were playing a Super 8 Race slot machine with Laura’s card in the machine when an announcement came over the loud speaker offering $1 hot dogs. Laura left to get two, and Jill moved over to her seat to watch the machine while her sister-in-law was gone. When Laura returned, the 9 yellow cars had come up and the machine signaled a hand-pay of $2,040. Laura sat back down in the seat she had left temporarily, and when the casino worker finally arrived, she handed him her driver’s license. Fifteen minutes went by before a security agent approached the women and asked who pushed the winning button. Jill said she had and explained why they later switched seats.

       He then escorted the two women to a locked room in the back, complete with a bench with built in handcuffs - an interrogation room. During this time the women were questioned on videotape, some paperwork was completed, copies of their driver’s licenses were made, and photographs were taken. After close to two hours, some papers were put in front of them to sign. It was explained that by signing the papers they were acknowledging that they were banned from the casino and could be arrested if they ever tried to reenter. The two just wanted to get out of there by then and so they signed. They complained that they were being treated like criminals for breaking a law they didn’t know existed.

       Later when they looked at what they had signed, they reacted indignantly at being treated like undesirables. Jill Waters wrote a letter of complaint to California’s Gaming Commission. She was later notified that the Pauma Band’s Gaming Commission would hold a closed hearing to review the matter and how they were treated. During that hearing the women were shown an edited videotape of the interrogation during which Jill admitted to having had past problems with the Internal Revenue Service. She said the editing made it appear she was admitting she was trying to avoid taxes by switching seats. She denied her IRS problems had anything to do with the change.

       The Pauma Gaming Commission finally ruled Jill could collect her $2,040 jackpot (which she has done), but said the lifetime ban will stay in effect. The reason given was "suspicious activity and spontaneous statements that confirmed her intent to avoid tax reporting requirements pursuant to Title 31”. Pauma officials were cleared of any wrongdoing by the California State Department of Justice which conducted a separate investigation into the matter after receiving Jill Waters’ complaint letter. That agency agreed the videotape showed a measure of collusion on the part of the players to avoid one person having to pay taxes on the winnings.

       I always liked Pauma Casino and the people who work there, and I felt it was a friendly place to play. But now I’m not so sure. The casino doesn’t seem to have handled this dispute very well. Do we know the whole story, I wonder. 

       This debacle took place around the same time that the government was extending the requirements for Title 31 compliance under the Bank Secrecy Act to casinos. Sometimes when a federal requirement is new, people don’t know how to apply those new requirements very well.

       There’s an article on the internet taken from Indian Gaming written by Stephanie Maddocks in September 2010 to help casinos understand what they were expected to do that was published about the same time these women were banned (July 2010). An earlier article by Joe Oprosko also in Indian Gaming in May 2007 addressed this same topic. Wikipedia says the US Senate Committee on Indian Affairs met Nov 17, 2011 for hearings on this issue. I mention these writings and dates only to show that this Title 31 compliance was a fairly new encumbrance at the time the Waters women were banned, and casinos were just learning how to meet their reporting obligations. 

        I would like to think that perhaps Pauma overreacted in their attempts to comply with these new Title 31 requirements that they didn’t yet understand very well.

       In any case, there’s a lesson to be learned from all this. If you are sharing a machine with a friend when a hand-pay jackpot comes up, don’t try to change who gets the W2G by lying or by changing seats. Just accept it’s the one who pushed the button. You can settle the money split and tax hit later without involving anyone else.

       Watch for coming articles on casino exclusion lists and Title 31.

Hand-pays Part 2

       There are a lot of articles written about gambling.  A few stand out as more credible than others. Among the more trustworthy writers are Michael Schakelford (The Wizard of Odds) and John Robison (The Gaming Guru.) Both have addressed on their blogs a common question posed by their readers: who receives the money on hand pays when one person’s money was in the machine, but another person pushed the button? And both respond with the same answer the casino manager at Pauma gave me when I asked her that question: “Whoever pushes the button gets paid the money.” 

       In John Robison’s article a husband and wife were playing $1 video poker and were dealt a $10,000 winning hand. The husband’s card and money were in the machine, but he and his wife were taking turns pushing the “deal button” and the wife’s spin brought up the big win. She was issued the hand-pay and the W2G. A reader asked if Harrah’s had handled this properly.

       The answer they got was “yes.” Robison said the player’s card was irrelevant; the person funding the spin is also irrelevant. The only person who matters is the person who pressed the spin button.
       You can read the Gaming Guru’s article at this SITE.

       Michael Shackelford’s reader questioned an earlier post where Mike had written that the person who hit the spin button wins the money. “The Wizard” responded saying he had asked three casino executives about this hypothetical situation. They all said the same thing: You can’t win a bet if you don’t make a bet. If you didn’t push the spin button, you didn’t make the bet.

       What if someone else did? He was told that if its your money in the machine, the casino will pay the person pushing the button if you consented to his initiating the spin. If he pushed the button without your consent, [which means he stole your credits] they won’t pay him, and there’s a chance they won’t pay you either. That will be decided on a case by case basis. There's a moral here: be a good customer that the casino wants to keep happy, and be vigilant guarding your machine.

       You can read Michael Schakelford’s article at this SITE.  

       More recently an article on TribLIVE also addressed what to expect when you hit a hand-pay slot jackpot. The writer interviewed Adrian Ashmore, a slot shift leader at Meadows Casino. Slot shift leaders such as Ashmore are involved when the total win exceeds $10,000 at that casino. Ashmore also says the jackpot goes to whoever pushed the “spin” button, regardless of whose player’s club card is in the machine.  

       You can read that article HERE.

       All these sources and many others say the same thing. The person who gets the jackpot is the one pushing the button. None of these articles mention Form 5754, you notice. Are the casinos unaware of this form - or do they just not want more paperwork to complete? Or do they not want the responsibility of completing W2Gs based on possible misinformation from the player in Part I about the people in Part II?  I don’t know. I can understand why the casino would be reluctant to send the government a W2G for someone named in Part 2 (who might not even know he was listed there).  I wouldn't want to do that. I can understand why the casinos would think the 5754 is a bother - just one more burden put on them by the government, one more piece of paper to retain.
       I think -- and my opinion doesn't matter -- that the form needs to be used, but it needs to be revised and require signatures from everyone in Part 2 also. If I were writing the rules, I might also have everyone attach a copy to his  tax return when he files - which is also not current procedure either. But we aren't going to change things, no matter what we think, and the casino is going to report in the way that's easiest for them regardless of how easy or difficult it is for us. So, bottom line - the reported winner is going to be the person who pushed the button. And I guess people gambling with friends need to keep that in mind when they play.

       You might be wondering why I posted this entry since I’m really not telling you anything new that wasn’t in my previous post. I’m just giving you a few additional sources to check that say the same thing. So why am I doing it?  My motives are not the best maybe. I know human nature being what it is, you will be more likely to accept published information if many reliable sources say the same thing - especially when the answer conflicts with our logic. This is too important to get wrong.

       I have one more story to tell about hand-pays. Watch for the write up about Laura and Jill Waters coming soon.

Hand-pays: Who Pushed the Button?

       Gaming is a social activity that’s more fun when you play with others. You’ll often see little old ladies gamble with their friends, pooling their funds while taking turns pressing the button to make their money and entertainment last longer. YouTube video filmmakers sometimes work in pairs or groups making their recording, one filming the action for his video while the other spins the reels for him to make it happen. Sometimes groups of  young guys who’ve had a little too much to drink ask perfect strangers to push their slot button for luck to start their bonuses. Sometimes people play on the free-play on someone else’s card - someone who may not even be at the casino - or they may add their credits to ones abandoned in a machine by a former player. Nobody thinks much about what would happen if one of these shared credits paid for a spin that hit a  hand-pay jackpot. 

       If one person has his player’s card and money in the machine, but the other person had his hand on the button when the reels brought up the lucky result, who gets the jackpot? Whose name goes on the W2G, and who pays the tax?

       Last April a “Slot Fanatic” who had just won his first hand pay (a slot jackpot over $1200 requiring the issuance of a W2G form by the casino for tax reporting) started a conversation thread that posed these very questions. He got some very interesting replies - some personal experiences, some opinions about what seemed reasonable, some misinformation - but no answers one could quote in print from either the IRS or from any State or Native American Gaming Commission. I’ve been scouring the internet for the past week myself looking for something in writing from someone other than a blogger. I finally have one. See the update inserted here.

     [UPDATE: 6/13/2015.  Colorado Gaming Regulation 47.1-1256 reads: A person lawfully playing a slot machine is the only person who can receive the award from a slot machine ... If more than one person is playing a slot machine, including two persons playing the machine together, the award must be given to the person who made a valid wager on the game and completed a valid game play.
       So there we have a quotable source from the Colorado Department of Revenue - The person who pushes the button gets the money and pays the tax.]

       So I have the answer to the question of who pays the tax, however, and it’s not one I like. The person who pushed the button will get the money from the casino, but he doesn't have to be the person who get the W2G. Here’s what my research says the the casino could do. 

       IRS has a form to use if there is a shared jackpot or if the person to whom the winnings are paid is not the actual owner or the only owner. It’s called Form 5754. (You can look at the form and its instructions on the internet at irs.gov.) It’s the same form that is used by the lotteries when there are shared winners of that jackpot. It’s the form that is currently in the news because Harrah’s refuses to use it to show the split of money between winners and sponsors at the World Series of Poker.

       It’s not hard to fill out the 5754 form. The person who “pushed the button” to whom the casino is going to pay the money is the recipient of record. He lists himself in Part 1 of Form 5754. In Part 2, he lists the actual owner/winner - the person whose money (and probably also whose players card) was in the machine. You will notice if you look at the form that he has to have that person’s Social Security Number (Tax ID Number) to complete the form. (Without it, the payer - the casino - has to withhold 28% in tax from the amount on his W2G.) The recipient of record listed in Part 1 signs the form under penalties of perjury. Then he gives it to the casino which is supposed to fill out a W2G for each of the actual owners listed in Part 2 - not the person they hand the money to who pushed the button - using this information.

       In the case of the old ladies sharing a machine and a jackpot, if the win was $1200, each one’s W2G would show $600.  They would each still get a W2G even though neither would be for $1200 or more. In the case of the YouTube filmers, “Button Pusher” will be listed in Part 1 only (unless he is also sharing in the winnings) and he will NOT get a W2G.  “Actual Owner” will NOT be listed in Part 1, but will be in Part 2. The W2G that both he and the IRS get from the casino will show his information  that was provided on the 5754 form. You can view both Form W2G and Form 5754 on irs.gov.

       So what is the problem? This seems easy and perfectly logical to me. The problem is the casinos. Some of them don’t want to use this form. 

       I spoke with a manager at Pauma Casino today. Paula is one of our smaller Native American casinos here in Southern California. I posed a hypothetical question about gambling jackpots to her - what does the casino do when the player whose money and players card are in the machine is not the one who pushed the button on the winning spin?  She didn’t like the idea of the two friends co-mingling funds, but acknowledged it happens frequently. But, like everyone else, she had the same answer to the question of who the casino pays the money to: "it’s always the one who pushed the button.” 

       I mentioned Form 5754 to her, and she said “Pauma doesn’t use that form.” I didn’t realize they had a choice - but in light of WSOP’s problems in the news, maybe they do. I asked her if there was anything in writing she could direct me to - there wasn’t - and whether it was an IRS or Gaming Commission Rule. She didn’t know. Each Native American Casino has its own Gaming Commission I learned, so different casinos could easily have different rules.  Or different ways of applying the same rules. Or, if they wanted, a “don’t ask, don’t tell” policy where they accept whatever the players say. I don’t know what happened in the case of the winner posting the question on Slot Fanatics. 

       The casino manager’s suggestion was that the person who pushed the button could ask the casino to withhold tax, and he could pay the person whose money and card were in the machine the rest of the payout if that’s what they agreed to. She suggested that when “Button Pusher” files, he includes the W2G income and withholding with his own gambling information on his 1040 and that he works things out with the other gambler if his tax increase caused by the jackpot doesn’t match what was withheld by the casino. Seems like a lot of trouble to me, when Form 5754 would clear everything up for everyone much more easily. 

       By the way, CPAs can not issue corrected W2Gs as some suggested on the Slot Fanatics site. Look at the form. Go to irs.gov if you don’t have one to look at. Your CPA is not the payer. The casino is.  A correction to an IRS form is made by the issuer who did it wrong to begin with. CPAs often attach statements to tax returns explaining inconsistent tax treatment when they file with different numbers than the payer forms show, but they can’t correct the form that was sent to the government by the casino. Only the casino can do that. Be careful relying on tax advice on blogs, especially if the blogger doesn’t have a background in law or accounting.

       I thought later while typing this that there is another question I should have asked the manager at Pauma when I had the chance. Is the spin that determines who is paid the money the one that brings up the bonus symbols to give you the bonus, or is it the one that starts the bonus play? 

       Most hand pays are the result of wins in the bonus rounds, so it might eliminate the problem if the person who provided the money to play the game also pushed the button starting the bonus reels. If the critical button-push is the one that starts the bonus play, maybe the YouTube filmers could get around their quandary by pausing their recording long enough to push the button starting the bonus themselves for at least that one spin. This won’t help the two old ladies sharing money and a machine, however, though the proper use of form 5754 would. It is better to ask your casino what their procedures for hand payouts are before your big win and then structure your playing accordingly. Especially if you are a gambler who likes to bet the max.

       I’ll be writing more about this later. I have two blog entries, one by Michael Schakelford - the Wizard of Odds - and another by the Gaming Guru John Robison, that I want to share with you on this subject. I also want to tell you the story of what happened to Laura and Jill Waters at Pauma a few years ago. Because this entry is so long, I’ll stop for now and put up Part 2  in a day or so.