Ask anyone in the tax business and they will tell you the worst way to be taxed is as ordinary income. This is because (with the possible exception of some corporate rates) you will pay tax at the highest rates in effect.
I’ve had several clients receive large sums of compensation in 2007. The reasons range from a pension or deferred compensation lump sum payout that was unavoidable, to a large lump sum that resulted from a business sale payout package.
Once income is received there is no way to defer the tax due. However, there may very well be a way to minimize it. Let’s look at a real life example.
Client Mark received a lump sum income distribution of 1 million dollars in 2007 from a business sale. He was going to owe close to 45% in income tax, or 450K. That would have left him with only 550K to retire on.
Since the taxable event had already occurred, his only option was to try and reduce the 450K tax bill.
This was accomplished with a Charitable Installment Bargain Sale. The idea was to get a large tax deduction to reduce the income tax due and then receive a guaranteed income stream over a period of 25 years.
Of the million dollar income, 750K was placed in a Charitable Bargain Sale with an initial donation of 75K cash to the charity. This was able to generate a 509K tax deduction when calculated using the 25year installment payout option for the remainder.
Even with the IRS rules for charitable deductions on high income earners, Mark will be able to reduce his AGI by almost 50% in 2007 using his tax deduction. He will receive monthly payments of $4,227.60 for 25 years for a total return on his 750K of $1,268,280.00 and his tax bill will be reduced by at least 50% for 2007 and be closer to 225K, for an immediate 225K tax savings.
That’s close to one quarter of one million dollars of immediate tax savings, and his income stream will be partially non taxable, as he has already paid tax on the principle. Only the interest component will be taxable as ordinary income in future years.
Every case is different, and including your tax advisor in the planning process is essential. All aspects of your situation should be considered, as well as estate and retirement planning needs.
It is definitely worth exploring your options when a large sum of income is accrued in one calendar year, especially if you are nearing retirement and will be needing as much of this money as possible to sustain your future income.
Be sure to put something in place prior to December 31sr . If you wait past the end of the tax year you will owe all of the tax in April.
Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html
Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php
Showing posts with label Case Study. Show all posts
Showing posts with label Case Study. Show all posts
Tuesday, December 04, 2007
Monday, October 08, 2007
A Good Problem to Have
It is true, the more money you have, the more options you have. That’s all good, and evidenced by a recent situation I encountered.
A man and his wife in their mid-fifties were receiving their portion of family real estate holdings in an upcoming sale. Their portion of the gain was 4.5 million dollars. They live in California, and there was depreciation recapture involved, so their tax obligation was over 1.3 million dollars if they sold outright and paid their tax bill.
We discussed many options and there was no bad plan. Most of us would be thrilled to have the choices they did. This was not their only asset or source of income. Even if they paid their taxes it would not have affected their current or future life style.
What they decided to do was a bit surprising, but given their situation, it worked for them.
They chose to do a 1031 exchange, but their choice of exchange property was a 4.5 Million dollar single family home that they eventually want to make their primary residence.
They plan to rent it out for a couple of years (who actually rents a 4.5M house?) to satisfy the exchange rules and then move in.
Even in California, 4.5M buys a pretty darn nice property. I can’t even fathom paying property taxes, insurance costs and upkeep on an annual basis- even if there is no mortgage. But then again, this is a problem I would love to have!
As you can tell, this couple can afford to take a loss if they have to. They have other assets and income which are unrelated to this property, and have options most of us will never have to worry about deciding between.
Their biggest concern going forward will be estate planning for passing wealth tax efficiently to future generations. (lucky kids)
I wonder if they have any interest in “adopting”. I am going to throw my hat in the ring.
Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html
Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php
A man and his wife in their mid-fifties were receiving their portion of family real estate holdings in an upcoming sale. Their portion of the gain was 4.5 million dollars. They live in California, and there was depreciation recapture involved, so their tax obligation was over 1.3 million dollars if they sold outright and paid their tax bill.
We discussed many options and there was no bad plan. Most of us would be thrilled to have the choices they did. This was not their only asset or source of income. Even if they paid their taxes it would not have affected their current or future life style.
What they decided to do was a bit surprising, but given their situation, it worked for them.
They chose to do a 1031 exchange, but their choice of exchange property was a 4.5 Million dollar single family home that they eventually want to make their primary residence.
They plan to rent it out for a couple of years (who actually rents a 4.5M house?) to satisfy the exchange rules and then move in.
Even in California, 4.5M buys a pretty darn nice property. I can’t even fathom paying property taxes, insurance costs and upkeep on an annual basis- even if there is no mortgage. But then again, this is a problem I would love to have!
As you can tell, this couple can afford to take a loss if they have to. They have other assets and income which are unrelated to this property, and have options most of us will never have to worry about deciding between.
Their biggest concern going forward will be estate planning for passing wealth tax efficiently to future generations. (lucky kids)
I wonder if they have any interest in “adopting”. I am going to throw my hat in the ring.
Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html
Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php
Tuesday, July 31, 2007
Case Study of Multiple Taxable Events in Same Tax Year
Recently I had a case where the same gentleman- I'll call him Joe- had two separate capital gains triggering incidents happen in the same tax year.
The first was a re-finance of a previous owner carry-back mortgage which triggered the remaining amount to be repaid in full prior to the end of the installment agreement. For several years he had been spreading out the capital gains tax and repaying it as he received principle through the payments made by the buyer. The amount of gain distributed and taxable at the end was about 400K.
The second event was also the result of an installment agreement issue. The buyer had been having trouble keeping up with the payments and foreclosure was the next logical step. A new buyer came to the rescue and agreed to pay off the remainder due from the original installment agreement plus the penalties assessed. This still meant receiving the remaining amount due as a lump sum and this was also about 400K..
It was too late to defer any capital gains tax in the first scenario, but not in the second. Joe did not need to keep a large lump sum, but did need an income stream to replace the payments he had been receiving monthly since his original sales.
So, the best solution was to do two Charitable Installment Bargain Sales. One with 300K cash and one with the remains of the second transaction.
What this accomplished was to give Joe almost a 200K tax deduction to reduce the amount of tax he was going to have to pay from the first transaction. He was able to cut it in half. Then his monthly income will be about $6500.00/month for the next 12 years. He is now 82. The way it is set up, each year those payments become less and less taxable.
Joe also has 100K from the proceeds to pay what taxes are due and put some in the bank for a rainy day or emergency.
If he passes on before the end of the 12th year, his heirs will receive the remaining payments.
Each case has a different solution depending on what there is to start with and what goals you wish to meet. Be sure and find out what your options are, or you may only have one- pay the tax in one big lump sum.
Paula Straub
760-917-0858
savegainstax@gmail.com
Fill out a Qualification Questionnaire to see if you qualify to hang onto your capital gains.
http://www.savegainstax.com/qq.html
The first was a re-finance of a previous owner carry-back mortgage which triggered the remaining amount to be repaid in full prior to the end of the installment agreement. For several years he had been spreading out the capital gains tax and repaying it as he received principle through the payments made by the buyer. The amount of gain distributed and taxable at the end was about 400K.
The second event was also the result of an installment agreement issue. The buyer had been having trouble keeping up with the payments and foreclosure was the next logical step. A new buyer came to the rescue and agreed to pay off the remainder due from the original installment agreement plus the penalties assessed. This still meant receiving the remaining amount due as a lump sum and this was also about 400K..
It was too late to defer any capital gains tax in the first scenario, but not in the second. Joe did not need to keep a large lump sum, but did need an income stream to replace the payments he had been receiving monthly since his original sales.
So, the best solution was to do two Charitable Installment Bargain Sales. One with 300K cash and one with the remains of the second transaction.
What this accomplished was to give Joe almost a 200K tax deduction to reduce the amount of tax he was going to have to pay from the first transaction. He was able to cut it in half. Then his monthly income will be about $6500.00/month for the next 12 years. He is now 82. The way it is set up, each year those payments become less and less taxable.
Joe also has 100K from the proceeds to pay what taxes are due and put some in the bank for a rainy day or emergency.
If he passes on before the end of the 12th year, his heirs will receive the remaining payments.
Each case has a different solution depending on what there is to start with and what goals you wish to meet. Be sure and find out what your options are, or you may only have one- pay the tax in one big lump sum.
Paula Straub
760-917-0858
savegainstax@gmail.com
Fill out a Qualification Questionnaire to see if you qualify to hang onto your capital gains.
http://www.savegainstax.com/qq.html
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