"Foriegn Earned Income Credit NOT allowed for Pro Gamblers"

[DesertCat]

[ QUOTE ]
SEP-IRA and Self-Employed 401(k) plans are available to most entity forms, including sole proprietors, and have the same contribution limits and deductibility.

[/ QUOTE ]

Well you can't fund it with gambling winnings, which is why I'm assuming you'll need the corporate entity, to convert gambling wins into income. Also, individuals are limited to 14k in contributions, to go up to the max of 42k, you have to have an "employer" contributions. Can a sole proprietor make "employer" contributions?

[ QUOTE ]

Higher Contribution Limits
• Fidelity's Self-Employed 401(k) allows you to make tax-deductible 401(k) salary deferrals to the plan of up to $14,000 for 2005.
• If you are age 50 or older you can make an additional catch-up salary deferral contribution of $4,000 for 2005.
• The plan also lets business owners make tax-deductible profit sharing contributions of up to 25% of compensation4, up to the annual maximum of $42,000 for the 2005 plan year.
• Note that the total of salary deferrals and profit sharing contributions cannot exceed $42,000 for 2005 (or $46,000 if age 50 or older).

[/ QUOTE ]

[mmcd]

Kane,

I suggest you talk to a good tax attorney about this rather than a CPA.

[broiler]

A self employed person with no employees should rarely set up a self employed 401k. The only reason I leave in rarely is because there are certain situations (low income and little chance of making near the income limits of the other plans). The only benefit of a 401k in this situation is the lower reporting requirements for a 401k plan. Once you get past about $75k in income, the profit sharing plan is a much better option. If you have non-family (spouse and children) employee, the 401k route might be the better option.

Also, a sole proprietor is considered to be their own employer and all of the contributions are employer contributions. Therefore, a corporate setup is not necessary for retirement considerations.

[mmcd]

[ QUOTE ]
Kane,

I suggest you talk to a good tax attorney about this rather than a CPA.

[/ QUOTE ]

Just to clarify a bit, here's the situation:

Generally speaking, a CPA will do your taxes and try to do them so you pay the minimum possible and try to avoid any potential problems with the IRS. They are reluctant to be aggressive in murky areas such as this. The IRS's position is that professional gambler's can't take the Foreign Earned Income Credit, so CPA's will go along with that. However, the IRS's position on a particular matter does not have the force of law. The IRC and Treasury Reg's and the court decisions that interpret them do. There is more than enough legal authority out there (some of which is in your previous thread on this matter) to support the position that the Foreign Earned Income Credit is available to professional gamblers. If you use it when you do your taxes, you will be doing nothing illegal.

If you take the credit, the IRS may catch it and decide to fight you on it, but as a practical matter it's very likley that your return just goes through unnoticed. If they do catch it and decide to fight you, they'll claim you owe them whatever amount you saved by using the credit plus interest and possibly some penalties. At this point, you can fight them in court and have at least a decent chance of winning (and be able to take the credit every year from now on without any problems) or offer to settle with them for some amount considerably less than you would have paid had you not taken the credit, which they might well accept. This is a situation where you have a lot to gain and little to lose. Best case scenerio, you keep taking the credit and they never even notice. Worst case scenerio, you take it, they catch it and decide to fight you on it and you either, pay a little more than what you would have anyways, settle it cheaply, or calculate the ev of going to court by weighing estimated legal costs and chances of sucess against the benefit of being able to take the credit freely every year in the future.

None of these technical tax issues are as cut and dry as some would have you believe.