Author Topic: Reduce Tax Bill to low-7-figure Equity Payout?  (Read 397 times)

DCisExpensive

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Reduce Tax Bill to low-7-figure Equity Payout?
« on: November 27, 2017, 06:47:56 PM »
Hey MM Forum,
I'm an employee (executive) at a mid-sized company and our owner has offered to buy out some of my phantom equity by the end of the calendar year.  It's a good deal for me, as I get to take some money off the table while keeping a significant amount of the phantom equity I own in the company.   The check, which I expect I'd receive in a few weeks (late Dec 2017) would be in the low 7 figures.

My question is:  Is there anything I can do to reduce the taxes I'll pay on that money?
I'm an employee (W-2, not K-1); so I expect the money will be taxed as traditional W-2 income.
I don't currently own a house, I make too much for my wife or I to use a Roth IRA (not that a Roth IRA contribution would move the needle).
We live in Virginia.

Is there anything I could do to reduce my tax exposure here?

Thanks!

MDM

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Re: Reduce Tax Bill to low-7-figure Equity Payout?
« Reply #1 on: November 27, 2017, 07:11:18 PM »
As a W-2 employee, beyond the pre-tax 401k and HSA (if eligible), perhaps a Donor advised fund might be your best bet.

This would be especially worth considering if you could donate investment shares with large unrealized gains.  The charitable deduction for that type of donation is limited to 30% of AGI, but could at least move the tax needle significantly.

seattlecyclone

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Re: Reduce Tax Bill to low-7-figure Equity Payout?
« Reply #2 on: November 27, 2017, 11:20:18 PM »
Hey MM Forum,
I'm an employee (executive) at a mid-sized company and our owner has offered to buy out some of my phantom equity by the end of the calendar year.  It's a good deal for me, as I get to take some money off the table while keeping a significant amount of the phantom equity I own in the company.   The check, which I expect I'd receive in a few weeks (late Dec 2017) would be in the low 7 figures.

My question is:  Is there anything I can do to reduce the taxes I'll pay on that money?
I'm an employee (W-2, not K-1); so I expect the money will be taxed as traditional W-2 income.

How exactly is the equity structured? Did you exercise any options in the past, or were you granted shares outright, or is this some unvested/unexercised equity? Even if the company isn't publicly traded, I would think you could get at least some of the income treated as capital gains if you owned the shares on paper for at least a year. There are various ways to structure this and you should probably talk to a tax advisor about it or at least give us some more details so we can point you in the right direction.

Regardless of how your equity is structured, you might be able to reduce the tax bill a bit if you could convince your boss to buy half the shares now and half in January to split it across two different tax years.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

DCisExpensive

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Re: Reduce Tax Bill to low-7-figure Equity Payout?
« Reply #3 on: November 28, 2017, 06:02:52 PM »
Thanks for the ideas/suggestions MDM and seattlecyclone!

I haven't heard of a Donor Advised Fund -- that seems like a great option!

seattlecyclone, this was all phantom equity; so sadly I never owned them, so sadly my understanding is that I can't get to cap gains.

Why would splitting the purchase across 2 years help?  Wouldn't I be in the top tax bracket regardless of all in 2017 or half in 2017 and half in 2018?

seattlecyclone

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Re: Reduce Tax Bill to low-7-figure Equity Payout?
« Reply #4 on: November 28, 2017, 07:23:22 PM »
If your income excluding this equity doesn't already put you in the top bracket, then some of your equity transaction would be taxed below the top bracket. Split it across two years and you double the amount that is taxed at less than the maximum rate, essentially.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

DCisExpensive

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Re: Reduce Tax Bill to low-7-figure Equity Payout?
« Reply #5 on: November 29, 2017, 06:23:56 AM »
Ah, that makes sense -- thanks @SeattleCyclone!