Suppose you’re an amateur gambler. Say you’re a college student. You net $45,000 playing poker tournaments. When you determine your annual wins and losses you find that your gross winnings are $800,000 and your gross losses are $755,000. You take the losses as an itemized deduction, and you pay tax based on the $45,000 of income (less your exemption and any other itemized deductions).
Under the House Health Care Plan (aka PelosiCare), the hypothetical gambler would be hit with a 5.4% surtax on his $800,000 of Adjusted Gross Income, or $43,200. Ouch.
So let’s see what the taxes would be (using 2008 rates, except for PelosiCare):
Federal Income Tax: $6,113
California Income Tax: $1,907
PelosiCare Surtax: $43,200
Total Taxes: $51,220
Yes, an individual would owe $51,220 of tax on $45,000 of income; he would actually lose $6,220 by earning $45,000! Ignoring the substantive issues with health care reform, the tax portion of the legislation is mind-boggling. It would also lead to more amateur gamblers not reporting their true income (e.g. more tax evasion) and would lead to lower tax collections in the United States.
Hopefully this proposal (which apparently is now 43 pages longer–up to 2,033 pages!) will die and something that’s a lot more reasonable will take its place.
Tags: HealthCareLegislation
Russ I’m surprised by the sloppiness of your example. The surtax only affects the marginal rate, so in your example the Surtax would be 300k*5.4% not 800k*5.4%. Also, the idea that a hobbyist would be able to rack up 800k in tournament entries during a year is pretty hilarious. Obviously the surtax goes away completely if your hypothetical student just files as a professional (as he undoubtedly should anyway given his volume of play) albeit at the cost of having to pay his SE tax.
In the original House legislation, the surtax began at the first dollar of income. I have been told that in the bill approved by the House yesterday that the surtax begins at $500,000 of income (single).
The ability to file as an amateur or a professional depends on the facts and circumstances of each individual. Generally, a full-time student will have the option of choosing.
But take an individual who works full-time (40 hours a week) and earns $150,000 from his day job. Suppose that same individual earns $50,000 net from playing poker tournaments. Each tournament is a separate session. It is quite possible for an individual to earn $800,000 of gross income but only $50,000 of net income. This is especially true for someone who specializes in sit-and-gos.
In 2006, playing baby tournaments ($3 and less), my gross winnings were $27,308. My net was just shy of $10,000. This was very, very part time.
My point is that it’s rather easy to rack up huge amounts of action. Take your average $1 slot player on vacation in Las Vegas for a week. Assuming 12 pulls a minute, he will rack up just over $15,000 in action per day. In the course of 7 days, the total comes to $105,840. that’s a LOT of action, and it’s what he is comped for by the casino. Of that $105, 840, we can comfortably estimate his winnings at 97% (some slots pay out more, some less). that comes to $102, 664. Of course, his net is $3, 176. Yet his tax on the surcharge is 5.4% of his GROSS winnings. That totals $5,715. Under Pelosicare, he’s a $2,539 loser.