Tax Board Outs Simpson, Sinbad, Warwick – The entertainment press has picked up on my earlier piece on the Calif. FTB’s list of unpaid taxes by celebrities.  I didn’t recognize Sinbad’s name on my first review of the list; but now we know who that is and that he owes over $2.1 million to the FTB. 

The California Franchise Tax Board has a policy of posting the names of taxpayers (or more accurately, non-payers) who owe more than $100,000 on this special page on their website.  They show the amounts and the city where the taxpayer was last known to reside.

As I’ve always mentioned, merely crossing the borders of the PRC is no reason to feel secure from the FTB’s extremely aggressive collection actions.  Several of the names have non-California addresses, including some celebrities such as:

Orenthal Simpson of Miami, FL owing $1,435,484.17 for personal income taxes

Dionne Warwick of S. Orange, NJ owing $2,665,305.83 for personal income taxes

What tax collector is crazy enough to go after OJ Simpson for back taxes, knowing his method of dealing with exes (ex-wife, ex home state)?

Q:

Subject: State tax question

Hello KMK,

Tax Guru is a neat website.  Compliments!

 

I am an Illinois accountant with a client with an Illinois S-corporation, but who lives in California.  With the lower Illinois individual income tax rate, I would like to have Illinois tax the S-corporation income, and leave it off of the California individual return.  Do you know how to do this in the California return?

 

If you do “out-sourced” tax research for others, please let’s discuss your charges for the service.  Thoughtful research is appreciated.

A:

It will all depend on which state is your client’s official tax home.  If it’s California, he will have to report all income from all sources (including the IL 1120S) on his Calif. 540.  Of course, he will also need to file a nonresident IL return.  He will be able to claim a credit against his CA taxes for part or all of the IL tax on that income.  As you know, the net effect of the out of state tax credit is that he ends up paying the higher of the two states’ taxes.

If your client can establish his official tax home in IL or another state, he can file a 540-NR as a CA part year or nonresident and then only allocate his CA source income to that state.  Many people use tax free states, such as Washington, Nevada, Texas, or Florida, as their official tax home for just this reason.

I hope this helps.  I’m still not caught up enough with the workload with my current paying clients to be able to accept any new ones.  General questions that should be of interest to my blog readers are always welcome however.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your prompt reply, and good advice.

Unlike with the annual inflation adjustment for the Federal individual income tax brackets, which are released well before the next year, the California Franchise Tax Board doesn’t release its new brackets until well into the subject year. They have just now released the 2007 rate schedules. 

Based on previous years, the 2008 Federal tax schedules should be out in about three weeks and will be posted on my main website shortly thereafter.

Shifting income from high tax states to those with low or zero tax rates has long been part of any aggressive tax saving strategy. I’ve been helping clients exploit these differences for decades.

I am amazed at how many people still live in a fairy tale world and deny that taxes at all levels (local, State, Federal) are very powerful motivators for behavior and thus think they can arbitrarily raise taxes with no consequences in the form of taxpayers leaving their jurisdiction.

There is a good explanation of how this works in real life in today’s National Review Online. Purely by coincidence, the town discussed is half located here in Arkansas.