Hello, all. I did some searching on 2+2 before posting, so I apologize if I missed something.

I won a big tournament ($160k) in January, and expect to pay the IRS a hefty sum at the end of the year. I was told that I can defer some of my tax liability by opening an SEP this year, and then withdrawing the funds next year when I would most likely be in a lower tax bracket. Is this true?

A little background on myself: I have not been filing as a professional poker player as that has not been my primary source of income. My poker wins are listed as gambling wins, less any losses I can prove. I do file with a Schedule C for my business, which is "computer consulting." My income varies wildly from year to year depending upon how much work I have done and how much money I have made from poker that year.

For the 2011 tax year, I most likely will not file as a professional poker player and will continue to file as a computer consultant. From my understanding, I should only be filing as a professional if my expenses I could deduct would exceed the 15% self-employment tax, which with a $160k win, I doubt it will.

My thinking is that I'd want to try to minimize my income in the 28%+ tax bracket this year by contributing max to an SEP, and then removing the funds next year when that income would most likely fall in the 25% tax bracket. Unfortunately, I don't really understand if I qualify for an SEP, and if I do, what the steps are to open one and fund it. I would appreciate some guidance, thanks.

Talk to someone.

If you withdraw next year you are going to be hit by a 10% penalty on the funds unless you are at reitrement age already. You could roll them over to a Roth IRA to avoid the penalty, but then it's 5 years before you can touch those and then it is only the principal and not earnings you can withdraw without paying a 10% penalty.

So you are looking at 6+ years to lower your tax by 3%. Seems bad. Just take the hit.

Oh and you can only put in ~20% of what you made as a consultant. The poker winnings wouldn't be eligible if you don't file Schedule C. So no way you can get all $160k in there or even most of it. Not to mention the SEP IRA cap in the high-$40s.

Thank you so much for the quick response. Will definitely be talking to Russ Fox about all of this, but thought I'd come to the 2+2 community first.

Someone at a poker table was the one who told me about the SEP, and my first question was whether there'd be penalties for early withdrawal. He said no. He must have been at retirement age and not realized the difference. lol

Any other tricks I am not thinking of to defer taxes to another year when I will be at a lower tax bracket? From the sounds of your post, probably not.

To clarify, I have no issue filing a Schedule C for my poker playing if it makes fiscal sense. I also am not opposed to any method that would put money off limits for any amount of time, if it would be a good investment.

i wouldn't worry about getting anyone on 2+2's advice on this and would just ask your accountant. i have a sep and don't think this would work but who knows, everyone's situation is different.