Another Tax post (but I still have questions)

[scott8]

Here's my quick story and I would more than appreciate anyone in the know to pass along some advice.

I am in my first official year of filing as a pro. I just met with a CPA and figuring that I would make 200k this year playing poker, I would owe about 80k in taxes.

I have not filed quarterly, but because this is my first year, I am exempt from a penalty - I had heard this elsewhere and this was confirmed by the CPA.

She suggested to divert some liability I open a 401k and fund it with 40k before the end of the year, this is in addition to some deductions for interest on school loans, and travel to vegas, and such got us to a figure of 80k.

Assuming these facts for now, do I have alternatives to save some tax liability that I have not discussed?

This number includes the 15% self-employment tax.
Also, I live in CA and I'm only 25 if that helps.
I don't own anything yet.

I can provide other information as needed, but I remember hearing about an S-corp, and some other options.

Anyway,
Thanks in advance,
SC

[TomR]

[ QUOTE ]
I have not filed quarterly, but because this is my first year, I am exempt from a penalty - I had heard this elsewhere and this was confirmed by the CPA.

[/ QUOTE ]
You are not exempt from the penalty for underpayment of estimated taxes soley because this is the first year that you are required to make estimated tax payments as your post implies. There are circumstances where you will be exempt, see Topic 306 - Penalty for Underpayment of Estimated Tax



Quoted from above link: (note that this quote is talking about penalties for 2004 returns, so if you are preparing or planning 2005 returns change the following 2004's to 2005 and the 2003's to 2004)

"The United States income tax is a pay–as–you–go tax, which means that tax must be paid as you earn or receive your income during the year. There are two ways to pay as you go. One is through tax withholding and the other is through estimated tax payments. Topic 355 provides information on paying estimated tax. If you do not pay enough tax through withholding or estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Most taxpayers will have paid enough tax to avoid this penalty if they have paid at least 90% of the tax shown on the return for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. However, if your adjusted gross income was greater than $150,000 in 2003, or $75,000 if you are married filing a separate return, the test is 90% of the tax shown on your 2004 tax return, or 110% of your 2003 tax, whichever is smaller. There are also special rules for farmers and fishermen.

Additionally, the payments must usually have been in approximately four equal amounts to avoid a penalty. However, if you made unequal payments because your income was received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals and Fiduciaries, to see if annualizing would reduce or eliminate the penalty.

You will not have to pay a penalty for underpayment of 2004 estimated tax if your tax liability minus your withholding and credits is less than $1,000. The penalty also will not apply if you had no tax liability for 2003, you were a U.S. citizen or resident for all of 2003, and your tax year included all 12 months of the year. Also, the penalty may be waived if:

1. The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
2. You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect."

[scott8]

"You will not have to pay a penalty for underpayment of 2004 estimated tax if your tax liability minus your withholding and credits is less than $1,000. The penalty also will not apply if you had no tax liability for 2003, you were a U.S. citizen or resident for all of 2003, and your tax year included all 12 months of the year."

This part applies to my situation.

[fooz]

Thanks for the helpful link Tom.

Any idea what the penalty actually is? I'm guess it's somekind of percentage? Ballpark?

[scott8]

bump.

[spkid]

With taxes, there are always options. Since you are paying S/E taxes I'm guessing you are set up as a "sole proprietor" and filing a Schedule C. That's much better than treating winnings as gambling winnings and losses as gambling losses (misc deduction subject to 2% of GI limit). It is also perfectly legitimate as there is case law to support treating gambling as a profession. Your CPA gave you great advice in regard to the 401k.

Where your CPA takes you from there is a matter of how aggressive he/she is. I would incorporate your business an elect "S" status (like you mentioned in your post). There are several thing you can do with this. First, you can pay yourself a "reasonable" salary and call the rest distributions to shareholder . This can save you a ton on S/E taxes. This is an aggressive stance, but then I always take an aggresive stance with my clients. As long as they are not audit sensitive. By that I mean as long as they don't have anything to hide.

Also, there may be some things that you can deduct that your CPA hasn't thought about. If you own your own home the home office deduction comes to mind. People fear taking this deduction but it is perfectly legitimate.

If you let me know what you are deducting I would be happy to give you some additional ideas.

[PSW]

I am pretty sure I want to file my a schedual C for 2005. My question is, do I need to do anything to signal the start of my business, other than keep records or poker wins/losses or do I need to make a filing to start things off?

Thanks very much

[broiler]

I just ran the numbers to see for myself if your tax number was reasonable and I also came up with about $80,000, assuming that you have nothing else going on. The retirement plan contribution of $40k knocked the tax number down to around $60k. I would also suggest health insurance, which is deductible in the same way as the retirement plan.

I would be careful about setting up an S-Corporation because the IRS has been cracking down on reasonable compensation for sole owners. They have no set formula, only an idea of what you should pay yourself in relation to your distributions. The other concern I have is that some states still tax the income of an S-Corporation at the corporate level and for some reason CA came to mind in my mental list. Never underestimate the power of a state to find a good way for double taxation. NY only did away with their tax about 3 years ago on S-Corporation income at the corporate level. I know that CA has a filing fee for S-Corps which is quite high and I don't know if you really want to pay more in tax and accounting fees than necessary with the increased audit risk.

[scott8]

[ QUOTE ]
I just ran the numbers to see for myself if your tax number was reasonable and I also came up with about $80,000, assuming that you have nothing else going on. The retirement plan contribution of $40k knocked the tax number down to around $60k. I would also suggest health insurance, which is deductible in the same way as the retirement plan.

I would be careful about setting up an S-Corporation because the IRS has been cracking down on reasonable compensation for sole owners. They have no set formula, only an idea of what you should pay yourself in relation to your distributions. The other concern I have is that some states still tax the income of an S-Corporation at the corporate level and for some reason CA came to mind in my mental list. Never underestimate the power of a state to find a good way for double taxation. NY only did away with their tax about 3 years ago on S-Corporation income at the corporate level. I know that CA has a filing fee for S-Corps which is quite high and I don't know if you really want to pay more in tax and accounting fees than necessary with the increased audit risk.

[/ QUOTE ]

I appreciate you taking the time.

I am going to do some more research on the S-Corp. I'm not necessarily against an increased audit risk, as I am not hiding anything, assuming the risk actually translates into a better tax break.

I think my next step is to talk to my CPA about the risks/rewards and if she is unclear than finding a CPA who is clear.

[pshabi]

I bet this post has that guy who is gonna make 400k this year dooking in his pants because he hasn't bothered with any of this crap yet, lol.