As I’ve said many times before, there isn’t anyone who is selling an appreciated asset who doesn’t want full liquidity, full control, high interest guarantees and no tax obligation whatsoever.
This is not an option unless you want the wrath of the IRS upon you. So, the best option is to use the current tax laws to full advantage and give up some of the above to receive some savings in return.
Unless you are doing a 1031 exchange which can defer all taxes, to save on capital gains you need to resolve yourself to take payments in one of the other strategies over time.
If you take it all at once, you pay taxes all at once. Period.
Receiving a payment stream is really a good thing in most cases. Especially for anyone approaching or already in retirement.
There is a reason why you don’t receive your company pension or your social security in a lump sum. Most people would go through the entire amount long before their lives were over and would have nothing to live on.
Just check the statistics on Lotto winners and professional athletes and entertainers.
I know it is appealing to think of a big pile of money sitting in your bank account where you can access it at any time. But, ask yourself when was the last time you needed to access a huge sum all at once while you were growing your asset over the years.
The next article will focus on some instances where having an ongoing income stream can really be of benefit.
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
Monday, December 10, 2007
Tuesday, December 04, 2007
Case Study for Lump Sum Distribution Tax Reduction
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
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
Monday, November 26, 2007
Upcoming Appearance on the Daily Bear Radio Show 11/27/07
Just wanted to let you know I will be appearing live on the radio on “The Daily Bear Show” on Money Matters Radio Network on Tuesday, November 27, 2007 at 8:20a.m PST/11:20am EST.
I’ll be discussing with host Lou Michaels how to maximize your retirement savings with capital gains tax strategies.
You can listen live on the internet with streaming audio at
http://www.moneymattersradio.net/
Hope you get a chance to tune in!
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
I’ll be discussing with host Lou Michaels how to maximize your retirement savings with capital gains tax strategies.
You can listen live on the internet with streaming audio at
http://www.moneymattersradio.net/
Hope you get a chance to tune in!
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
Monday, November 05, 2007
Those in These Categories Need to Take Action by Year’s End
Does this sound like your situation?
It’s already November and the end of the tax year is approaching quickly. If you are in any of the following situations, you need to act now or it will be too late to lower your tax obligation for 2007.
* You sold an asset in 2007 tax year with capital gain of over 100K and did not have a tax saving strategy in place prior to sale.
* You are getting a large lump sum of compensation by December 31st which will put you into a high tax bracket and you will be sending 33%-50% to the IRS in the form of income tax.
* The sale of your asset will occur on or before December 31, 2007 and you will have a capital gain of over 100K.
Depending on which category you fall into, your savings could range from significant to massive. In all the above cases, it is crucial you have the understanding of the consequences vs. rewards should you decide to act and protect your monies.
Many people think that April is my busiest month since that is tax deadline. This is true for CPAs and tax professionals who file returns but not for me.
December is one of my busiest months because it is the last chance to minimize a tax obligation which occurs in the current calendar year.
With the pressure of the holidays approaching, give yourself a gift and don’t wait until the last minute to hang onto your gains. It’s no fun come April 15th when you have to write out a huge check to the IRS and you wish you could have a “do-over”.
Fill out the confidential Qualification Questionnaire at the link below and I will contact you directly, or call me at (760)917-0858 for a complimentary consultation. You still have time to act, but this window will be closed before you know it!
http://www.savegainstax.com/qq.html - Questionnaire link
Paula Straub
Save Gains Tax LLC
savegainstax@gmail.com
http://www.savegainstax.com/
It’s already November and the end of the tax year is approaching quickly. If you are in any of the following situations, you need to act now or it will be too late to lower your tax obligation for 2007.
* You sold an asset in 2007 tax year with capital gain of over 100K and did not have a tax saving strategy in place prior to sale.
* You are getting a large lump sum of compensation by December 31st which will put you into a high tax bracket and you will be sending 33%-50% to the IRS in the form of income tax.
* The sale of your asset will occur on or before December 31, 2007 and you will have a capital gain of over 100K.
Depending on which category you fall into, your savings could range from significant to massive. In all the above cases, it is crucial you have the understanding of the consequences vs. rewards should you decide to act and protect your monies.
Many people think that April is my busiest month since that is tax deadline. This is true for CPAs and tax professionals who file returns but not for me.
December is one of my busiest months because it is the last chance to minimize a tax obligation which occurs in the current calendar year.
With the pressure of the holidays approaching, give yourself a gift and don’t wait until the last minute to hang onto your gains. It’s no fun come April 15th when you have to write out a huge check to the IRS and you wish you could have a “do-over”.
Fill out the confidential Qualification Questionnaire at the link below and I will contact you directly, or call me at (760)917-0858 for a complimentary consultation. You still have time to act, but this window will be closed before you know it!
http://www.savegainstax.com/qq.html - Questionnaire link
Paula Straub
Save Gains Tax LLC
savegainstax@gmail.com
http://www.savegainstax.com/
Wednesday, October 31, 2007
Bottom Line – Installment Sale Through a Foundation – Part V
So far, I have addressed some of the ins and outs of the 1031 exchange, the Charitable Remainder Trust, the Structured Sale, and now will do the same for the Installment Sale Through a Foundation.
There is no one particular strategy that is right for everyone, and it behooves you to work with someone who can review your whole financial picture and needs so that you can compare and contrast all of your options and find the right one or ones for you.
The Installment sale through a foundation works with pretty much all highly appreciated assets. Currently, there is only one foundation set up to handle this transaction though I predict more will follow suit over time. This strategy had been in the works for over a year to handle the disposition of C-Corps, but was put into full swing in January 2007 following the removal of the Private Annuity Trust for tax deferral by the IRS in October 2006.
A Charitable Bargain Sale is performed by a 501C3 Charitable Foundation and the asset is purchased by the Charity at a discount from Fair Market Value. The Charity then sells the same asset at fair market value to your buyer and receives the proceeds in cash.
The amount of discount is your donation to the charity, which launches a charitable deduction for you to reduce your taxable income for up to a total of 6 years, or until the deduction granted has been fully used up. If there are taxes due for depreciation recapture or due to forgiveness of debt, this deduction will reduce the amount owed at time of your next tax filing. There will also be partial forgiveness of capital gain and depreciation recapture on the amount donated.
The charity then enters into an installment sale agreement with you, the seller, to pay back the remainder of the money over time in installment payments with a fixed interest rate on those monies between 5.5 and 6%. The remainder of the capital gains tax due is paid only as received as in the Structured Sale and is spread out over many years.
Your actual tax deduction will be greater than the original contribution, as there is a projected deduction added for an additional contribution at the end of the contracted payments. Any interest earned in excess of the interest paid out to you will go to the charity once the installment agreement has been satisfied. The charity provides a letter of explanation regarding the deduction to the IRS at time of close and to you for your records.
Since you have an installment contract with the foundation, if there is a need to amend the terms in the future, as long as both parties agree and any penalties for early withdrawal are accounted for and paid, the contract can possibly be amended or canceled. Please note, although circumstances may warrant such an act, it is almost always better financially to stick to the original terms.
So, what you need to address is how much will it cost to set up? How is my money invested and protected? What if something happens to the foundation? Are there any ongoing fees? Do I have legal representation? Do my heirs get any monies left over if I pass away before the installment agreement has been satisfied?
Because your monies are invested and segregated with a large insurance company in a commercial annuity product with a principal guarantee there is little risk of loss, as is the case with the Structured Sale. Since here the annuity is not annuitized, it allows for a higher interest rate payout and more flexibility.
It is always a good idea to compare each vehicle side by side for your unique situation. The bottom line should be safety, tax minimization and overall return. The whole idea is to keep as much of your proceeds as legally possible and to do it with as little risk as possible.
It is just as imperative to work with a professional who understands the ins and outs of each strategy and can explain the pros and cons of each. If you don’t know the right questions to ask or what answers to expect, you may not fully understand what you have committed to and it will be too late to change your mind.
This is where I can be of most help.
Paula Straub
http://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
There is no one particular strategy that is right for everyone, and it behooves you to work with someone who can review your whole financial picture and needs so that you can compare and contrast all of your options and find the right one or ones for you.
The Installment sale through a foundation works with pretty much all highly appreciated assets. Currently, there is only one foundation set up to handle this transaction though I predict more will follow suit over time. This strategy had been in the works for over a year to handle the disposition of C-Corps, but was put into full swing in January 2007 following the removal of the Private Annuity Trust for tax deferral by the IRS in October 2006.
A Charitable Bargain Sale is performed by a 501C3 Charitable Foundation and the asset is purchased by the Charity at a discount from Fair Market Value. The Charity then sells the same asset at fair market value to your buyer and receives the proceeds in cash.
The amount of discount is your donation to the charity, which launches a charitable deduction for you to reduce your taxable income for up to a total of 6 years, or until the deduction granted has been fully used up. If there are taxes due for depreciation recapture or due to forgiveness of debt, this deduction will reduce the amount owed at time of your next tax filing. There will also be partial forgiveness of capital gain and depreciation recapture on the amount donated.
The charity then enters into an installment sale agreement with you, the seller, to pay back the remainder of the money over time in installment payments with a fixed interest rate on those monies between 5.5 and 6%. The remainder of the capital gains tax due is paid only as received as in the Structured Sale and is spread out over many years.
Your actual tax deduction will be greater than the original contribution, as there is a projected deduction added for an additional contribution at the end of the contracted payments. Any interest earned in excess of the interest paid out to you will go to the charity once the installment agreement has been satisfied. The charity provides a letter of explanation regarding the deduction to the IRS at time of close and to you for your records.
Since you have an installment contract with the foundation, if there is a need to amend the terms in the future, as long as both parties agree and any penalties for early withdrawal are accounted for and paid, the contract can possibly be amended or canceled. Please note, although circumstances may warrant such an act, it is almost always better financially to stick to the original terms.
So, what you need to address is how much will it cost to set up? How is my money invested and protected? What if something happens to the foundation? Are there any ongoing fees? Do I have legal representation? Do my heirs get any monies left over if I pass away before the installment agreement has been satisfied?
Because your monies are invested and segregated with a large insurance company in a commercial annuity product with a principal guarantee there is little risk of loss, as is the case with the Structured Sale. Since here the annuity is not annuitized, it allows for a higher interest rate payout and more flexibility.
It is always a good idea to compare each vehicle side by side for your unique situation. The bottom line should be safety, tax minimization and overall return. The whole idea is to keep as much of your proceeds as legally possible and to do it with as little risk as possible.
It is just as imperative to work with a professional who understands the ins and outs of each strategy and can explain the pros and cons of each. If you don’t know the right questions to ask or what answers to expect, you may not fully understand what you have committed to and it will be too late to change your mind.
This is where I can be of most help.
Paula Straub
http://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
Wildfire Aftermath
I just want to take a moment to thank everyone who sent their good thoughts my way during the recent fires here in San Diego. It worked because my home was spared despite spending three days with my bags packed and on standby evacuation status.
Many others weren’t as fortunate and are faced with the inordinate task of getting their lives back on track after losing everything they own.
A tragedy such as what happened throughout Southern California will have some far reaching impacts that most don’t think about.
Those who lost businesses no longer have a source of income but may still have outstanding business expenses to deal with. Those who lost homes with mortgages still have those payments to make as well as the cost of alternative living arrangements.
Those with properties for sale in affected neighborhoods will no doubt be forced to reduce asking prices or hang onto them for years.
Many will face foreclosure or bankruptcy. Insurance often does not cover all the expenses which arrive and it takes a long time to rebuild.
Real estate is a great investment in most cases and should be part of any portfolio. If you are house rich and cash poor any act of nature can upset your financial and retirement plans. And, yes, it Can happen to you.
Ask any of the people affected by these fires if they’d rather have a guaranteed income stream still arriving every month at this point or a paid up home which has just been demolished. I know what my choice would be.
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
Many others weren’t as fortunate and are faced with the inordinate task of getting their lives back on track after losing everything they own.
A tragedy such as what happened throughout Southern California will have some far reaching impacts that most don’t think about.
Those who lost businesses no longer have a source of income but may still have outstanding business expenses to deal with. Those who lost homes with mortgages still have those payments to make as well as the cost of alternative living arrangements.
Those with properties for sale in affected neighborhoods will no doubt be forced to reduce asking prices or hang onto them for years.
Many will face foreclosure or bankruptcy. Insurance often does not cover all the expenses which arrive and it takes a long time to rebuild.
Real estate is a great investment in most cases and should be part of any portfolio. If you are house rich and cash poor any act of nature can upset your financial and retirement plans. And, yes, it Can happen to you.
Ask any of the people affected by these fires if they’d rather have a guaranteed income stream still arriving every month at this point or a paid up home which has just been demolished. I know what my choice would be.
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
Thursday, October 25, 2007
The IRS Giveth, and the IRS Taketh Away
If you haven’t noticed a pattern yet, when tax law changes to benefit one segment of the population (resulting in a loss of revenue to the IRS), there is usually some other change that reduces benefits to a different population segment, thus making up for the former loss.
Such is exactly what will happen if pending legislation passes into law.
HR 3648, or the Mortgage Cancellation Tax Relief Act, passed the House of Representatives Oct. 4, 2007 and is up for consideration in the Senate. If the bill becomes law, its tighter restrictions may require a new strategy for some investors.
Here is the gist in laymen’s terms of what this might mean to the average investor.
If you are in danger of foreclosure on your existing mortgage, a buyer may make a deal with your lender to purchase your home for less than what you owe. You are “forgiven” the difference from the lender, but under current tax law you must declare this forgiven amount as income on your tax return and pay income tax on money you don’t have. If you are already having trouble making mortgage payments, you often have trouble coming up with this extra tax payment and you are back to square one.
HR 3648 would exempt you from having to declare this as income in this situation. That’s the good news, but that’s a lot of money the IRS would be losing.
So, in order to save those with mortgage issues, the proposal is to tighten the rules for taking some personal exclusions on primary residences. Currently, if you own and live in your home for at least 2 of the last 5 years, you are allowed a personal exclusion of 250K if single and 500K if married filing jointly for capital gain when you sell.
What patient and savvy planners have been doing is selling their primary residences, taking the exclusion and moving into their appreciated second home or investment property for 2 years and then selling it and taking another exclusion to once again avoid capital gains tax.
What HR 3648 will do is limit the amount of exclusion available to you to the gain accrued only during the time you reside in that second property. So, if the property had increased in value by 300K prior to you moving in, then another 100K in the 2 years you resided in it, your exclusion would be limited to 100K when you sold and not the currently allowed 400K total gain (if married).
As with any tax law, if you are in neither of these situations you probably could care less. If you fall into the second category you will need a “plan B” to minimize your capital gains. Just be aware that laws constantly change and what is true today may be obsolete tomorrow. It’s a full time job just keeping up!
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
Such is exactly what will happen if pending legislation passes into law.
HR 3648, or the Mortgage Cancellation Tax Relief Act, passed the House of Representatives Oct. 4, 2007 and is up for consideration in the Senate. If the bill becomes law, its tighter restrictions may require a new strategy for some investors.
Here is the gist in laymen’s terms of what this might mean to the average investor.
If you are in danger of foreclosure on your existing mortgage, a buyer may make a deal with your lender to purchase your home for less than what you owe. You are “forgiven” the difference from the lender, but under current tax law you must declare this forgiven amount as income on your tax return and pay income tax on money you don’t have. If you are already having trouble making mortgage payments, you often have trouble coming up with this extra tax payment and you are back to square one.
HR 3648 would exempt you from having to declare this as income in this situation. That’s the good news, but that’s a lot of money the IRS would be losing.
So, in order to save those with mortgage issues, the proposal is to tighten the rules for taking some personal exclusions on primary residences. Currently, if you own and live in your home for at least 2 of the last 5 years, you are allowed a personal exclusion of 250K if single and 500K if married filing jointly for capital gain when you sell.
What patient and savvy planners have been doing is selling their primary residences, taking the exclusion and moving into their appreciated second home or investment property for 2 years and then selling it and taking another exclusion to once again avoid capital gains tax.
What HR 3648 will do is limit the amount of exclusion available to you to the gain accrued only during the time you reside in that second property. So, if the property had increased in value by 300K prior to you moving in, then another 100K in the 2 years you resided in it, your exclusion would be limited to 100K when you sold and not the currently allowed 400K total gain (if married).
As with any tax law, if you are in neither of these situations you probably could care less. If you fall into the second category you will need a “plan B” to minimize your capital gains. Just be aware that laws constantly change and what is true today may be obsolete tomorrow. It’s a full time job just keeping up!
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
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