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Tweetbag: Withholding Gambling Winnings of U.S. Nonresidents

September 17th, 2012 4 comments

Today I received the following inquiry:

“[L]ooking for some info why 30% was tak[en] out of an $83 winning in poker at a NY state casino when most states tax after 5k.”

The casino in this case was the Seneca Niagara Casino, located in Niagara Falls, NY.

To evaluate the issue, we need to know whether the taxpayer is a U.S. resident. That’s because the rules for withholding and informational reporting of gambling winnings under the Internal Revenue Code depend on the residency status of the taxpayer.

It turns out this taxpayer is a resident of Canada. In general, gambling winnings paid to foreign individuals are subject to 30% withholding, assuming the income is not effectively connected with a U.S. trade or business. Proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel, however, are not amounts subject to reporting.

Here, it seems that Seneca properly withheld thirty percent of the $83 winnings, as poker is not exempt from nonresident withholding.

Note that an applicable tax treaty between the United States and a treaty partner may reduce the amount withheld by Seneca Niagara. The United States-Canada Tax Treaty, however, offers no such relief.

Is there any other relief? Suppose the same taxpayer enters in only one other poker tournament during the year paying an $83 entry fee, and loses. Now the taxpayer has net $0 of gambling winnings for the year, yet approximately $25 was withheld on the $83 win. One shouldn’t pay $25 in U.S. tax on net zero gambling winnings. To possibly obtain a refund, the taxpayer could file a Form 1040NR to claim the winnings and losses for the year and the amount withheld.

Keep in mind that the withholding and informational rules discussed above are pursuant to federal law, not state law. Again, U.S. casinos are required to withhold 30% and issue a Form 1042-S to nonresidents unless an exception applies.

Of course, some states have their own separate informational and withholding rules for state income tax purposes. But they are not in lieu of federal law, which still must be followed, but are in addition.

The comment that “most states tax after 5k” is likely a reference to the federal rule that requires all U.S. casinos to issue a Form W-2G to U.S. residents who win more than $5,000 in a poker tournament, net of the entry fee. Note, however, whether a W-2G is actually issued has no bearing on whether the actual winnings are taxable, as all gambling winnings of U.S. residents are taxable, regardless of the amount.

Angels in the Big Apple?

May 13th, 2012 No comments

Just over a week ago I wrote about New York’s poor ranking as a state for entrepreneurship and small businesses. State Assemblymaker Micah Kellner is making an effort to change that, especially for newer businesses.

Mashable is reporting a bill titled the Angel Investor Income Tax Credit is making its way through both houses in the state. Read here the current version of A09958, the State Assembly bill.

The bill allows up to a 25% tax credit for angel investors who invest from $25,000 to $1 million in a “qualified business” in New York State.

The colloquial definition of an angel investor is a high net worth individual who puts up funds for a start-up in exchange for some equity or other interest.

Of course, this bill defines the term, stating an angel investor is someone who qualifies as an “accredited investor” under Rule 501 of Regulation D of the Securities Act of 1933.

Accredited investors range from certain companies to charities to high net worth individuals. Read the list of accredited investors here.

The bill, however, exempts some accredited investors, including investors controlling at least fifty percent of the qualified business and venture capital firms.

So to what types of businesses should angel investors consider giving their money to obtain the credit?

The business, whether a sole proprietorship, partnership, or corporation, is a “qualified business” as long as it

  • (i) did not generate more than $1 million in gross revenues in the year immediately preceding the year the investor seeks to claim the credit;
  • (ii) does not have more than twenty-five full-time employees, at least sixty percent of which must be employed in the state;
  • (iii) has operated in the state for no more than seven consecutive years; and
  • (iv) has received no more than $2 million in investments eligible for the credit from one or more angel investor.

The credit would apply against New York State income tax. An angel investor with no New York State income tax for the year the investment is made cannot make use of the credit that year. The bill, however, does allow an investor to carry over an unused portion of the credit to a subsequent tax year.

In the Mashable piece, Kellner is quoted for saying “[t]he last thing I want is the next Twitter or Facebook being developed in New York, only to be commercialized and have their company headquarters end up in Connecticut. [Startup jobs] are good jobs and I want them here in New York.”

I don’t see how passage of this bill would keep a booming start-up in New York for the long-term. An angel tax credit isn’t why Twitter has kept its headquarters in San Francisco. A controversial measure extending an exemption from San Francisco’s payroll tax is why.

The bill was introduced in the State Assembly on April 26 and referred to the Committee on Ways and Means. The bill’s Senate equivalent was introduced on May 9 and referred to the Committee on Investigations and Government Operations.

The Twitter Tax Break…Win Now, Lose Later?

April 5th, 2011 No comments

Earlier today, the San Francisco Board of Supervisors approved a six year payroll tax deferral for certain companies moving their headquarters into the city’s depressed Mid-Market area.  To qualify, a company must have a payroll exceeding $1 million.  The tax-friendly measure is set for final vote next week.

The Board’s action results from many of the city’s high tech companies threatening to take their operations elsewhere.  You may have heard of Twitter, Zynga, or Yelp.  All are located in San Francisco.  All are hit hard by the city’s 1.5 percent tax on employee compensation, including exercised stock options, of companies with payrolls exceeding $250,000.

Predictably, the Board seeks to keep these booming start ups within city limits:

Today’s vote is a vote to keep jobs in San Francisco. This policy is a crucial positive step in the ongoing effort to revitalize the Central Market and Tenderloin neighborhoods. Twitter’s commitment to move to this challenged stretch of Market Street and stay in San Francisco shows that we are not content to simply become a bedroom community for Silicon Valley. The companies that are born here should grow here.

Twitter led the debate at the Board’s weekly meeting, but the microblogging sensation has yet to comment on this measure.  Certainly, their in house and out house counsel are in the process of determining the next move.  As fellow tax blogger “taxgirl” suggests, perhaps these companies should have just continued to pay up given their estimated worth relative to the additional tax, considering the city’s fiscal troubles.  They may win the battle if the temporary tax break is implemented, but lose the war by facing a permanently damaged public perception.

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