Lots of questions have come in during the past few weeks. Here are a few that might interest you.
1. I recently settled a lawsuit for wrongful termination, and was awarded $100,000 after attorney fees of $50,000. How much of this will be taxable?
Generally, all proceeds of lawsuits are taxable. There’s an exception for physical illness or injury under Section 104(a) of the Tax code. Emotional distress is another exception. Punitive damages aren’t, though.
To add to the complexity of this issue is that you generally have to include the attorney fees in your income. If your wrongful termination is based on unlawful discrimination, you will be able to deduct the attorney fees as an itemized deduction.
This is a complex area, and I strongly advise you to seek professional tax advice.
2. I recently relocated to South Korea from California. Will I have to pay California income tax?
Probably. Generally, your domicile doesn’t change if you move outside of the United States. California will assume that you plan on returning to the Golden State. If you’re a Korean citizen returning to Korea then you won’t, of course, have to file a California tax return.
If you’re not, though, I have a second piece of bad news. On your federal tax return you’re eligible for the foreign earned income exclusion. California does not conform to this deduction; you will owe California income tax on the entirety of your income.
Again, this can be a complex tax area and you should seek professional advice.
3. I play in a [poker] home game series of tournaments. I won an entry into the $10,000 buy-in main event of the World Series of Poker. Will I have to report that on my tax return? If the entry I won for the 2010 WSOP would I have to report it on my 2009 tax return or my 2010 return?
This is actually a complex question. First, all income, including gambling income, is taxable in the United States. If you had won your entry through a satellite at the WSOP, you would have won a piece of paper. You would be required to enter the main event. In that case, your result in the tournament itself would determine whether or not you have any gambling income to report. It’s like a parlay bet; you won the first half but in order to make any money you must cash in on the second half of the bet.
However, you won the entry in a home game. And this is where it gets tricky. You could make the same argument (as above). If you have a written agreement among the participants and/or the funds were wired directly to the Rio Hotel in Las Vegas (where the WSOP is held) you’d have a better case. The IRS could try to argue that you won $10,000 in cash (less your buy-in), and that you need to report the win as gambling income. Of course, if you don’t cash in the main event of the WSOP, you will have a $10,000 gambling loss.
This gets even more complex if you win an entry into the 2010 main event, and you receive $10,000 in cash in 2009. The IRS could argue, and likely would argue, that you won $10,000 of gambling income in 2009. You would then potentially have a $10,000 gambling loss in 2010. But remember, you can only take gambling losses up to the amount of your wins.
Of course, this may be a hypothetical question, but it does illustrate a couple of important points. First, all gambling income is taxable, even amounts won in home games. Second, paperwork counts! If there’s a written agreement that pre-dates the tournament you played in you have a much better case for the parlay bet.
If your situation is complex you should seek professional assistance with your tax return.