Three questions of interest this weekend. The first deals with moving to Nevada, the second with the requirement to report foreign financial accounts, and the third deals with deducting clothing.
First, a reader asks: I want to move to Nevada. I will move my busines there also. However, most of my business will still be done in California. Will I still have to pay income taxes on my business profit and income from other investments?
If you truly move from California to Nevada, and are a Nevada resident, you will no longer owe California income tax. Similarly, if your business reincorporates (if it is a corporation) or otherwise changes its domicile to Nevada, and no longer is present in California, then it, too, will no longer be taxed by California.
This being tax, there are several caveats to be aware of. Among these are the following:
- In the year you move, you will need to file a partial year California tax return. California will tax you on all California source income for that year.
- Be aware that California, like many other states, will attempt to tax you if you spend two weeks (or more) in the Golden State on business.
There are several other “gotchas” that you should discuss with your tax professional.
Next, I’ve gotten several questions relating to the filing of the report of Foreign Bank and Financial Accounts. Here’s one of many: I read on your blog of the need to file the Report of Foreign Accounts. But I don’t want to because it will increase my risk of audits, and I don’t think it’s required. I read on 2+2 that online poker accounts are ‘transfer accounts’ and not foreign bank accounts. I’m not a big gambler, so why should I file this form?
First, Congress wrote this law. The IRS and the Department of the Treasury have the thankless task of interpreting this law.
And this law is fairly clear: Foreign financial accounts must be reported if an individual has $10,000 or more in one or more foreign financial accounts. Casinos in the United States fall under financial institution reporting requirements; why shouldn’t casinos in other countries be considered foreign financial institutions?
Additionally, many of these online casinos offered “echecks” and would take money directly from patrons’ checking accounts. Those are activities that banks perform.
As to why you should file this form, it’s simple: It’s required. If you don’t, and you are caught, you can face up to a $10,000 fine for non-willful non-reporting and a minimum $100,000 fine for willful non-reporting. You can also find yourself sent to ClubFed. If you think that the defense “I didn’t know about this” or “I was a small time player” will work, I’ll tell you now that neither will.
If you’re such a small-time gambler, you’re not a likely target for an audit (the IRS goes where the money is; generally, the more you make the higher your risk of audit). While the TwoPlusTwo poker forums have excellent poker information, you have to be very careful when you read legal and tax threads. The defense, “I relied on Joe Schmoe from TwoPlusTwo” will likely result in the judge asking you if he was your paid professional preparer.
Yes, you’re not likely to get caught. The odds are definitely in your favor. But it’s the law to report these accounts. You may not like the idea that the same people who enforce this law (the IRS and the Department of the Treasury) get to interpret this law. Unfortunately, that’s the way it is, and you will get no sympathy from the IRS, the Department of the Treasury, or a judge. I’m advising all my clients who have these accounts and meet the reporting requirements ($10,000 or more at one or more foreign financial accounts) to report them.
Here’s the third question. I’m a personal trainer, and I can’t believe the answers I’ve gotton [sic] from my accountant. I can’t believe that gym shoes aren’t deductible for me, and that gym memberships aren’t deductible for my clients. Tell me he’s wrong.
Sorry, your accountant is generally correct. For most individuals, health club memberships are not deductible. I’d probably go insane during tax season if I didn’t go to the gym but Congress says I can’t deduct that. Congress makes the laws, and that’s the way it is. (A few people who have to go to the gym for medical reasons may be able to take a gym membership as a deductible medical expense. Of course, that’s subject to a 7.5% Adjusted Gross Income limitation so not many will be able to deduct it that way, either.)
As for clothing, to be deductible it must not be usable outside of work. A policeman’s uniform, for example, is clearly deductible. However, his black socks wouldn’t be. Gym shoes aren’t deductible as they can be used outside of a health club.
Well, perhaps I made one of the three individuals who wrote me happy. As usual, I suggest you consult your own tax professional on any issues that you have.
Tags: FBAR