So there we were, a bunch of guys in their 40s on a Tuesday night, sitting around a corporate conference room table playing our once-a-month friendly game of Texas Hold ’em.
n the big screen, the Sox were busy beating the Indians, the credenza was overflowing with pizza, Doritos and drinks, Attorney Steve was busy talking about landing a big one for his firm, CPA Rob was talking about his daughter’s birthday and somewhere at the far end of the table I could hear ultra-successful investment banker Brad mumbling about his wife demanding a pit-stop at Publix for a frozen chicken.
And there, sitting at the head of table was myself, concentrating on one thing and one thing only: staring down film producer Rod, wondering if he was trying to bluff me out of yet another hand. Believing a third rub of his eye was his tell, I called his “all-in” and heroically managed to beat his two-pair with a straight to the ten.
Although losing the biggest hand of the night wasn’t destined to be his fondest memory, I did manage to give him the bright side of things: technically speaking, the money he just lost could potentially be a tax write-off for him.
Surprising? To many people, it most certainly is. In fact, I find many people aren’t aware of the laws regarding the thing we all look forward to, sometimes referred to as “winning free stuff.”
So, while you may not find yourself hanging out with the Hold ‘Em gang on a Tuesday night, who knows? You may find yourself the proud owner of something for free. And in the event you do land such a thing, when it comes to taxes and other related issues, here’s a few quick things to keep in mind https://www.ibizcyprus.com
1. WINNING THE LOTTERY
Given there’s a better chance for me to win Powerball than for my New York Jets to win another Super Bowl, I suppose I should remind myself of what will happen if I got so lucky to win the biggest lottery in the land.
Generally, all lottery winnings are subject to federal, state and local taxes. An award under $600 dollars is often not reported, however, technically speaking, any amount you win needs to be reported as taxable income. Large winnings are reported on IRS form 5754 and other than swimming to Cuba with cash stuffed up your pants, there’s no way to avoid taxes when winning the big one.
Disappointed? Don’t be. For those that don’t appreciate lengthy swims to foreign lands, you may want to consider not playing the big one at all….. Why?… Well, consider this: Powerball is played twice a week and the odds of winning are roughly 120,000,000 to 1 (which is close to the odds of my Jets winning another Super Bowl). Doing the math, if you lived to be 77, then you would have to buy roughly 15,000 tickets for each drawing (approximately 30,000 tickets each week) to give yourself a 1:1 chance of winning.
That’s not very good odds, and yet another reason why you might want to consider sticking with that nice morning run around the neighborhood instead of training for a swim to Cuba.
2. CASH PRIZES
Have you ever won a cash prize? I once did. High school, 7-11, a scratch-off-something where I think I won somewhere around $20 dollars (and no, I don’t believe I reported that to the IRS).
When it comes to winning a cash prize, this one is fairly simple: cash prizes are taxable, and as a result, federal, state and local taxes are owed on the amount you win. Typically, anywhere from 10% to 25% of the winnings could be withheld from large amounts awarded. As for the rest, you’ll have to pay the rest come tax time.
3. PRODUCT PRIZES
Forget Phil Mickelson. A few years back, a buddy of mine once landed a very sweet hole-in-one at a charity golf tournament. Not only did he get a peck on the check from the snack girl, but he also won a brand new Porsche.
Sound good? It sure did, until he learned Uncle Sam wanted to ride shotgun. When it comes to winning product prizes, the IRS says you’ll have to pay federal, state and local tax on fair market value, rendering the peck on the cheek from the pretty snack girl the only thing you may want to actually take home with you.
Who wouldn’t want to win money at a casino? I certainly would, and if anyone out there has had the experience of doing such a thing, toss me a note about how it feels.
When it comes to winning big money, casinos typically withhold 30-40% of the winnings. Ironically, however, the tax laws are actually different depending on the game you played to win it.
See, the casinos managed to convince congress there’s no way they can possibly keep track of everyone, especially at the lower wage tables when playing blackjack, baccarat, craps, roulette or the big wheel. As a result, generally speaking, when playing at those tables, the winnings are generally not reported to the IRS – but technically speaking, the gambler is always supposed to report any winnings as money received.
And as for comps, get this: technically speaking, those things you get for free could be deemed taxable items as well. Needless to say, I don’t know of many people that report a comped surf and turf down at the Bellagio on their tax return, but once again, technically speaking, all that free stuff could be something to report as well.
Other tidbits that come to mind include:
- Bells ringing all over creation? Congratulations on your win, but winning money at slots will be reported if the amount is over $1200.
- Pick a few winners on Keno? Well done. But any amount above $1200 will be reported as well.
- Chicago Buck or Eddie’s Revenge come in first? That’s real sweet and it may even get you a date with the best looking girl on the block, but remember: winnings down at the horse or dog track over $5,000 or 300x the wager will be reported.
- If you’re like me and typically lose more than you win, here’s an important point: generally, one can write off gambling losses against their income, but only up to the amount of their winnings.
- Excess losses cannot be carried forward to the following tax year.
- Gambling at an Indian Reservation? Have fun, bring a date, win huge, quit your job, enjoy the Elvis impersonator but remember, all the rules above still apply.
- To substantiate wins and losses, the IRS requires a journal of record that states a list of items including, (1) the date and type of your wagers; (2) the name of the gaming establishment; (3) the address or location of the gaming establishment; (4) the names of the other person(s), if any, present with you; (5) the amount(s) you won or lost; and lastly, (6), whether or not you were drinking, and if you were, the type of drink you had (just kidding).
Get a Nintendo for your birthday? That’s great, especially since I’ll be glad to come by and challenge you to a set of tennis. But what if it was a really nice gift? The type of gift I’m talking about is the one over $12,000. Get one of those sweet somethings and technically speaking, the person who made the gift is required to pay the tax on its fair market value (note: $12,000 is for tax year 2007 only; the amount typically changes every year).
So, the next time someone wants to buy you the New England Patriots, be sure not to tell them they’ll have to pay the tax, otherwise, you’ll likely end up with the NY Jets instead.
As far as I’m concerned, ending up with the Jets and someone having to pay the tax is lame, but it is the law. But don’t despair, there are exceptions to the rule. Gifts that are generally not taxable include tuition and medical expenses paid by someone else, gifts to your spouse, gifts to a political organization and gifts to charities.
Uncle Moe was a great guy. Not only did he buy your first Who album, but he also left you a few million bucks to boot. Not bad. But while a few mill is all well and good, don’t think for a moment that the other uncle of ours doesn’t want his cut as well.
Sad, but undeniably true, even that occasionally annoying thing called “Death” can be taxed. Specifically, the type of tax I’m referring to is often called “the death tax,” or, technically speaking, the “estate tax.”
If there’s any good news about the estate tax, it’s that few families actually incur it. Statistically, only a small percentage of people will have to deal with this, but in tax year 2007, if Uncle Moe died with over $2 million, you’ll likely have to pay estate tax on the amount inherited above that “exempted” amount.
Going into details about the estate tax is far beyond the focus of this posting, but it is an important point, and if it hasn’t been addressed within your family, trust me: it’s something you should most definitely look into the different ways one can potentially reduce it.
I love winning free things. After all, who doesn’t? But whether it’s landing snake eyes, a hole-in-one or someone off-loading the New York Jets, next time Lady Luck rears her beautiful head, keeping in mind the things above could be some important points to remember.