Foreign Earned Income: Do Professional Gamblers Have Earned Income?

April 5, 2012 by  Filed under: Taxes 

For purposes of claiming the Foreign Earned Income Exclusion, one must have income earned in a foreign territory. Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, lists earned income as salaries and wages, commissions and bonuses, tips and professional fees. It also includes related payments such as vacation, sick leave, severance, certain reimbursements and allowances. The list of unearned income include annuities, alimony, capital gains, dividends, interest, unemployment and social security benefits, and gambling winnings. But what if your means of livelihood is gambling? Will your winnings still be considered unearned?

It is hard to define what it means to be a professional gambler. Every situation is different and the U.S. Tax courts do not have a “one case fits all” template to follow as guidelines for determining whether one is a professional gambler or not. In the IRS Letter Ruling 8235006, May 21, 1982, a taxpayer was engaged in full-time gambling activities such as playing cards and wagering in various sports games. The taxpayer had a daily routine he followed like studying the games, playing cards, and making bets. Yet according to the ruling, the taxpayer was not considered a professional gambler because his gambling activities were not considered a trade or business within the definition of Code Section 162(a). According to this code section, a deduction of all ordinary and necessary expenses paid or incurred is only allowed for carrying on a trade or business.

In another case, Pansy v. Panages, a taxpayer gambled regularly but only after she was done with her regular work. The tax court ruled that the taxpayer’s gambling activities were not a trade or business as gambling was not her primary means of livelihood. The taxpayer maintained a flower shop business in addition to another wholesale business that occupied most of her time. The courts argued that “for gambling to reach the level of a trade or business activity it must be ‘pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and ***not a mere hobby'”. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). As a result, the taxpayer could not deduct her gambling losses on Schedule C, although she may have been able to itemize them on Schedule A.” Foreign Earned Income “

Just from the above case and ruling we have an idea of how difficult it is to determine what constitutes a professional gambler. In general, you are a professional gambler if you are regularly engaged in full-time gambling with the primary purpose of making a living. Weekend gambling trips to Las Vegas does not make one a professional gambler.

As a professional gambler, one will have earned income reportable on Schedule C. Consequently, as someone engaged in a trade or business of gambling, losses and business expenses are deductible up to the amount of his winnings. Examples of expenses related to gambling include travel, meals and entertainment, interest, telephone and internet, vehicles expenses, and other fees and expenses.

Professional gamblers living outside of the United States will be able to claim the Foreign Earned Income Exclusion if they meet the physical presence test or the bona fide residence test. However, they will be subject to self-employment taxes unless the foreign country in which they reside has a totalization agreement with the United Sates.

David Odom is a US Citizen who during his trip to India was informed about his requirement to still File US taxes in spite of not having US income.Since then, he began investigating expatriate taxation and now writes articles on the subject – so that fellow Americans don’t run into the same issues as he did.

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