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Around December-January of this year, I am expected to get a small windfall of $80K - $100K (pretax) from the sale of my company stock. I am looking for advice regarding minimizing my taxes, as this payout will be considered additional compensation and will be taxed at a higher rate (not at dividend tax rate).My tax bracket is 28%. Thus far, I am thinking of doing the following:-          Maxing out my 401K ($18,000)-          Buying a 2-3 single family houses or 1-2 multi families (I am an experienced RE investor)Other than above, I am not sure what else I can do to minimize my tax exposure. I fully recognize that tax advice is not being provided and I should talk with a tax professional, however if you have any experience/ideas regarding minimizing the tax exposure for Tax Year 2017, I would greatly appreciate it!

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What is your base income(not including the windfall)?  There is an AGI threshold, above which your personal exemption an... (more)

TJtv (Sep. 29, 2016 @ 8:41p) |

OP said the extra money will be considered ordinary income. You can deduct only $3000 a year of your capital losses from... (more)

fwall (Sep. 29, 2016 @ 11:15p) |

Actually you COULD.  Look up https://sivers.org/trust -- he did exactly that.  I almost guarantee he is paid at some lev... (more)

RedWolfe01 (Sep. 30, 2016 @ 3:46a) |

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rated:
you can donate it to charity.

rated:
Max out 401k? You should be doing this now.
Buy 2-3 houses? Where does this give you tax breaks? (As Most likely you have a home)

Start an IRA

rated:
Buying real estate wont reduce your tax liability on that money.

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any way to split it into 2 tax years? not sure if that will ultimately help, but at least it will give you a whole year to try and finagle savings on that part. Or if you income is expected to drop next year try to move it all to 2017.

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As stated, buying an investment property does nothing to help you on taxes. Unless you really want to be a landlord, don't bother. It CAN be a great investment, but it's not for everyone.

Max out your 401k, HSA, and any other tax deferred accounts. Then just pay your taxes and be done with it.

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blok said:   Buying real estate wont reduce your tax liability on that money.
well...you can take losses, including depreciation...these often exceed the income received such that you have a legal "paper loss" that can reduce taxable income, up to 25k for an active investor. this is especially true if the property needs extensive repairs - those are typically expensed in the year they occur.

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solarUS said:   
blok said:   Buying real estate wont reduce your tax liability on that money.
well...you can take losses, including depreciation...these often exceed the income received such that you have a legal "paper loss" that can reduce taxable income, up to 25k for an active investor. this is especially true if the property needs extensive repairs - those are typically expensed in the year they occur.

  
But if he's got 80-100k of extra regular income he'll and he's already in the 28% bracket then he will be above the income level for passive loss deductions for the year.   ETA (unless he's a real estate pro)
 

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blok said:   Buying real estate wont reduce your tax liability on that money.
Losing money on a rental property could reduce your overall liability. But more than likely, you won't be able to claim all of the rental losses in the year of your windfall because your AGI will be too high. However, the losses do carryover to subsequent years.

I always tell people never to make huge financial decisions based on their tax implications alone. If you were planning on investing in rental property with you windfall anyway, then by all means, structure the transactions to get the best possible tax benefit. But if you are just looking for a way to reduce your tax liability, spending thousands of $$$ on a complicated real estate transaction that will just create more tax headaches over the coming years isn't a great idea. Since you are an experience real estate investor, I suppose you were planning on doing this anyway.

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jerosen said:   
solarUS said:   
blok said:   Buying real estate wont reduce your tax liability on that money.
well...you can take losses, including depreciation...these often exceed the income received such that you have a legal "paper loss" that can reduce taxable income, up to 25k for an active investor. this is especially true if the property needs extensive repairs - those are typically expensed in the year they occur.

  
But if he's got 80-100k of extra regular income he'll and he's already in the 28% bracket then he will be above the income level for passive loss deductions for the year.   ETA (unless he's a real estate pro)

yeah i guess you're right. all else being equal, it's likely he'll be above the PAL threshold.

 

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Start a business in which you buy equipment that can be expensed 100% in the first year? Better be a real business.

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BMA2016;19646748 said:Around December-January of this year, I am expected to get a small windfall of $80K - $100K (pretax) from the sale of my company stock...
Stop thinking of it as an $80k - $100k windfall.  Change your mindset and start thinking of it as a $60k -$75k windfall since that is what you will really be getting.  

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solarUS said:   
blok said:   Buying real estate wont reduce your tax liability on that money.
well...you can take losses, including depreciation...these often exceed the income received such that you have a legal "paper loss" that can reduce taxable income, up to 25k for an active investor. this is especially true if the property needs extensive repairs - those are typically expensed in the year they occur.

  my understanding is that repairs made before the property is put into service as a rental must be depreciated, not deducted.

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rufflesinc said:   you can donate it to charity.
  
I donate a percentage of my income to charity. Similar to tithing without the religious considerations. I'd like to invest these dollars.

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forbin4040 said:   Max out 401k? You should be doing this now.
Buy 2-3 houses? Where does this give you tax breaks? (As Most likely you have a home)

Start an IRA

I already max out the 401K, however it's done incrementally (per pay period). I am thinking $18K max out in early 2017.
The houses would be investments.

I'll definitely look into an IRA -- how does that reduce my tax liability?

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blok said:   Buying real estate wont reduce your tax liability on that money.
  
Hmm, not even with an interest rate buydown/repairs/upgrades?

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millervtranger said:   any way to split it into 2 tax years? not sure if that will ultimately help, but at least it will give you a whole year to try and finagle savings on that part. Or if you income is expected to drop next year try to move it all to 2017.
  
Unfortunately no way to split it in two years.

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rascott said:   As stated, buying an investment property does nothing to help you on taxes. Unless you really want to be a landlord, don't bother. It CAN be a great investment, but it's not for everyone.

Max out your 401k, HSA, and any other tax deferred accounts. Then just pay your taxes and be done with it.

  
I'm already a landlord -- have a single family house, a duplex and a condo.

I can do a 401K, I can't set up an HSA as my company has one set up and funded for me. What other tax deferred accounts exist? 529s?

I'm willing to pay the taxes on the remainder.

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solarUS said:   
blok said:   Buying real estate wont reduce your tax liability on that money.
well...you can take losses, including depreciation...these often exceed the income received such that you have a legal "paper loss" that can reduce taxable income, up to 25k for an active investor. this is especially true if the property needs extensive repairs - those are typically expensed in the year they occur.

  Yes, exactly what I was thinking. I have a RE license and have a number of properties as well, therefore, I should be classified as an active investor.

rated:
jerosen said:   
solarUS said:   
blok said:   Buying real estate wont reduce your tax liability on that money.
well...you can take losses, including depreciation...these often exceed the income received such that you have a legal "paper loss" that can reduce taxable income, up to 25k for an active investor. this is especially true if the property needs extensive repairs - those are typically expensed in the year they occur.

  
But if he's got 80-100k of extra regular income he'll and he's already in the 28% bracket then he will be above the income level for passive loss deductions for the year.   ETA (unless he's a real estate pro)

  
Having an RE License and 4 units of Investment Properties (2 separate mortgages) -- does that qualify as a Real Estate pro?

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TravelerMSY said:   Start a business in which you buy equipment that can be expensed 100% in the first year? Better be a real business.
  Tough to do when I am working a day job. I don't want to do anything illegal/want to keep it in the confines of the tax code.

rated:
dcwilbur said:   
BMA2016 said:   Around December-January of this year, I am expected to get a small windfall of $80K - $100K (pretax) from the sale of my company stock...
Stop thinking of it as an $80k - $100k windfall.  Change your mindset and start thinking of it as a $60k -$75k windfall since that is what you will really be getting.  

  I understand what you're saying. The reason why I am asking about what others have done in this situation is to find creative yet legal ways of minimizing the tax exposure so that I can preserve most of that windfall. I would rather invest 100% of the amount rather than seeing a dime of it in my bank account. If I can save some taxes in the process, it'll be great.

rated:
rufflesinc said:   
solarUS said:   
blok said:   Buying real estate wont reduce your tax liability on that money.
well...you can take losses, including depreciation...these often exceed the income received such that you have a legal "paper loss" that can reduce taxable income, up to 25k for an active investor. this is especially true if the property needs extensive repairs - those are typically expensed in the year they occur.

  my understanding is that repairs made before the property is put into service as a rental must be depreciated, not deducted.

  Really? I'll check on that. I was hoping that it could be expensed within the year unless it was a major structural improvement. I am thinking cosmetics.

rated:
any chance to have it somehow go to a different entity? other family member / investor / etc?

rated:
BMA2016 said:   
jerosen said:   
solarUS said:   
blok said:   Buying real estate wont reduce your tax liability on that money.
well...you can take losses, including depreciation...these often exceed the income received such that you have a legal "paper loss" that can reduce taxable income, up to 25k for an active investor. this is especially true if the property needs extensive repairs - those are typically expensed in the year they occur.

  
But if he's got 80-100k of extra regular income he'll and he's already in the 28% bracket then he will be above the income level for passive loss deductions for the year.   ETA (unless he's a real estate pro)

  
Having an RE License and 4 units of Investment Properties (2 separate mortgages) -- does that qualify as a Real Estate pro?


Asking what qualifies you as a real estate pro suggests you aren't one. It's not complicated. To qualify for non-passive tax losses, you have to spend at least half your time materially participating in the real estate work, and that must be at least 750 hours per year. If you've got another full time job, it's not likely. A realtor license is not part of the calculation.

I don't think you've clarified why the company stock is being sold - any chance you can have it split so half is in 2016 and half in 2017? If it's publicly traded and there's an acquisition in the works, I'd sell half in December if it looks like there's any chance the transaction won't close before the end of the year.

rated:
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

I did some research and it looks like I can allocate:

$18K to the 401K
$14K to 529

This shields about $32K from taxes.

rated:
SlimTim said:   
BMA2016 said:   
jerosen said:   
solarUS said:   
blok said:   Buying real estate wont reduce your tax liability on that money.
well...you can take losses, including depreciation...these often exceed the income received such that you have a legal "paper loss" that can reduce taxable income, up to 25k for an active investor. this is especially true if the property needs extensive repairs - those are typically expensed in the year they occur.

  
But if he's got 80-100k of extra regular income he'll and he's already in the 28% bracket then he will be above the income level for passive loss deductions for the year.   ETA (unless he's a real estate pro)

  
Having an RE License and 4 units of Investment Properties (2 separate mortgages) -- does that qualify as a Real Estate pro?


Asking what qualifies you as a real estate pro suggests you aren't one. It's not complicated. To qualify for non-passive tax losses, you have to spend at least half your time materially participating in the real estate work, and that must be at least 750 hours per year. If you've got another full time job, it's not likely. A realtor license is not part of the calculation.

I don't think you've clarified why the company stock is being sold - any chance you can have it split so half is in 2016 and half in 2017? If it's publicly traded and there's an acquisition in the works, I'd sell half in December if it looks like there's any chance the transaction won't close before the end of the year.

  
Fair enough. I would not qualify based on the parameters that you provided.

The company stock is timebound grant with maturity date that will either occur on December, 2016 or (at the discretion of the Management) may occur in January, 2017. My preference is for a January, 2017 payout as I can immediately max out the 401K, set up and max out on the 529. With the remaining funds, I would take the tax hit, however if there is some way I can invest those post tax dollars in a manner where I can realize some tax savings by the end of the year, I should be able to reduce my overall tax liability and perhaps receive a refund when I file 2018 taxes. A bit convoluted route, therefore I am testing the feasibility of this plan. 

rated:
meade18 said:   
blok said:   Buying real estate wont reduce your tax liability on that money.
Losing money on a rental property could reduce your overall liability. But more than likely, you won't be able to claim all of the rental losses in the year of your windfall because your AGI will be too high. However, the losses do carryover to subsequent years.

I always tell people never to make huge financial decisions based on their tax implications alone. If you were planning on investing in rental property with you windfall anyway, then by all means, structure the transactions to get the best possible tax benefit. But if you are just looking for a way to reduce your tax liability, spending thousands of $$$ on a complicated real estate transaction that will just create more tax headaches over the coming years isn't a great idea. Since you are an experience real estate investor, I suppose you were planning on doing this anyway.

  
Great response. You are spot on. I was planning on expanding the RE portfolio, however I wanted to put some dollars towards the 401K and other tax deferred investments as well. This not only allows for some tax exposure but also allows for diversification of investments.

rated:
BMA2016 said:   
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

I did some research and it looks like I can allocate:

$18K to the 401K
$14K to 529

This shields about $32K from taxes.


FYI, 529 Plan contributions are not tax-deductible for your Federal return, but some states allow for a deduction. 

After the 401(k) and any deductible IRA contributions, you're best bet is donating to charity. Whatever you donate, you don't pay taxes on.
Congrats on the stock "bonus", defer the maximum in the 401(k), pay your taxes, and invest the rest. 

For future advice, don't get caught up in avoiding taxes at the expense of poor investment decisions. 

Edit: To clarify 529 tax-deduction only applies to some states and not Federal. 

rated:
mjohnson said:   
BMA2016 said:   
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

I did some research and it looks like I can allocate:

$18K to the 401K
$14K to 529

This shields about $32K from taxes.


FYI, 529 Plan contributions are not tax-deductible. 

After the 401(k) and any deductible IRA contributions, you're best bet is donating to charity. Whatever you donate, you don't pay taxes on.
Congrats on the stock "bonus", defer the maximum in the 401(k), pay your taxes, and invest the rest. 

For future advice, don't get caught up in avoiding taxes at the expense of poor investment decisions. 

 

  To clarify, there's no federal ncome tax deduction for 529 plans; however, some states have state deductions.

rated:
BMA2016 said:   
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

I did some research and it looks like I can allocate:

$18K to the 401K
$14K to 529

This shields about $32K from taxes.

As pointed out, the 529 contribution does not reduce your federal tax obligation.  As for the 401k, you should have been doing that all along.  All these other tips about investing and real estate have nothing to do with this income.  To answer your original question, the only thing you could do to minimize the exposure on the windfall would be to change the manner and/or timing in which you receive it.  It doesn't sound like you can do either, so take the hit and move on.  Your overall tax strategy doesn't have much to do with this particular occurrence with the exception of you possibly being in a higher tax bracket for this year because of the one-time event. 

rated:
BMA2016 said:   
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

 

  ah it's too bad you couldn't have it go directly to your own charitable foundation 

rated:
I was going to suggest pre-paying as much of next year's property taxes, association dues, etc as possible to gain some more write-offs for this year, but came across a mention of delaying paying your property and incurring the penalty in some cases because it may reduce the amount of AMT you need to pay, if affected.  You'll need to see if you are affected by the AMT.  For those affecting with paying AMT, the "late payment strategy" may come into play.   article mentioning paying property taxes late 

rated:
mjohnson said:   
BMA2016 said:   
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

I did some research and it looks like I can allocate:

$18K to the 401K
$14K to 529

This shields about $32K from taxes.


FYI, 529 Plan contributions are not tax-deductible. 

After the 401(k) and any deductible IRA contributions, you're best bet is donating to charity. Whatever you donate, you don't pay taxes on.
Congrats on the stock "bonus", defer the maximum in the 401(k), pay your taxes, and invest the rest. 

For future advice, don't get caught up in avoiding taxes at the expense of poor investment decisions. 

 

  
Actually in my state, I can reduce the tax exposure on the 529 plans.

Thanks for the advice.

I am not sure how avoiding taxes = poor investment decisions. This is something that HNWIs, Corporations do all the time. Even if I place dollars in a 529 plan for my future kids, it'll still be better than giving up the money to the tax man.

rated:
stanolshefski said:   
mjohnson said:   
BMA2016 said:   
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

I did some research and it looks like I can allocate:

$18K to the 401K
$14K to 529

This shields about $32K from taxes.


FYI, 529 Plan contributions are not tax-deductible. 

After the 401(k) and any deductible IRA contributions, you're best bet is donating to charity. Whatever you donate, you don't pay taxes on.
Congrats on the stock "bonus", defer the maximum in the 401(k), pay your taxes, and invest the rest. 

For future advice, don't get caught up in avoiding taxes at the expense of poor investment decisions. 

 

  To clarify, there's no federal ncome tax deduction for 529 plans; however, some states have state deductions.

  Exactly. My state happens to be one that has the deduction.

rated:
dcwilbur said:   
BMA2016 said:   
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

I did some research and it looks like I can allocate:

$18K to the 401K
$14K to 529

This shields about $32K from taxes.

As pointed out, the 529 contribution does not reduce your federal tax obligation.  As for the 401k, you should have been doing that all along.  All these other tips about investing and real estate have nothing to do with this income.  To answer your original question, the only thing you could do to minimize the exposure on the windfall would be to change the manner and/or timing in which you receive it.  It doesn't sound like you can do either, so take the hit and move on.  Your overall tax strategy doesn't have much to do with this particular occurrence with the exception of you possibly being in a higher tax bracket for this year because of the one-time event. 

  
Again, I am not sure where the "401K -- I should have been doing this along comes from"? I HAVE been contributing the max 401K for the past 5 years on my usual income, the only difference is that $18K of this payout will immediately max out my 401K in one shot.

Good advice regarding the rest. I am also concerned about the tax bracket shift as well.

rated:
rufflesinc said:   
BMA2016 said:   
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

 

  ah it's too bad you couldn't have it go directly to your own charitable foundation 

  
I know, total bummer

rated:
momoman said:   I was going to suggest pre-paying as much of next year's property taxes, association dues, etc as possible to gain some more write-offs for this year, but came across a mention of delaying paying your property and incurring the penalty in some cases because it may reduce the amount of AMT you need to pay, if affected.  You'll need to see if you are affected by the AMT.  For those affecting with paying AMT, the "late payment strategy" may come into play.   article mentioning paying property taxes late
  Excellent advice + article. I'll look into that. I see that there are not many ways to outright reduce the tax exposure, so I'll see what type of write-offs, expensed items I can include for the 2017 Tax Year.

rated:
I would like to thank everyone for their advice/comments. This does not occur very often, therefore, I wanted to see what options existed.

Of course, I will consult with a tax professional to make sure that I am doing the right things and taking legal steps to minimize my taxes.

Skipping 10 Messages...
rated:
BMA2016 said:   
rufflesinc said:   
BMA2016 said:   
walletfart said:   any chance to have it somehow go to a different entity? other family member / investor / etc?
  Unfortunately not, it will need to go to my name.

 

  ah it's too bad you couldn't have it go directly to your own charitable foundation 

  
I know, total bummer

  
Actually you COULD.  Look up https://sivers.org/trust -- he did exactly that.  I almost guarantee he is paid at some level from the trust as an administrator or manager.   Still has to actually put money out to support the goals of the foundation and that is its OWN form of taxing.  

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