Author Topic: strategies to mitigate taxes on a windfall?  (Read 1112 times)

jgm

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strategies to mitigate taxes on a windfall?
« on: September 23, 2018, 01:26:33 PM »
In January I cashed out a (mostly) long-term capital gains windfall of ~500k, so I'm on the hook for 100k+ in taxes. I never did much with the cash because I was really afraid of a misstep, and also got conflicting advice from CPAs, so just sat on my hands.

I've read a lot about optimizing taxes in the FI communities over the years, but I can't find anything that applies to my situation. I'm really looking for any possible feedback or strategies because I fear I might be blowing a once-in-a-lifetime opportunity, and we're entering the final quarter of the year.

Relevant details:
-40yrs old, single, head of household.
-Live in a condo that's down 100k in value. Bought at the peak in 2006, never recovered. 250k left on the loan at 3.75%.
-Job salary is 150k, but I desperately want out of the workforce.
-Have a few software projects that trickle in some income on the side, but it's generally a loss after home office deductions (schedule C).
-Net worth 1.4M (mostly in the stock market, aside from windfall); maxing out 401k and IRA, HSA.

Some ideas:
-Sell my place this year and use that 100k loss as a deduction - but apparently this is disallowed by the IRS. :( Any creative ways to leverage this loss?
-Put in ~15k worth of repairs/upgrades into my place, which I can deduct if I rent it out? Or some other rental strategy..?
-Buy an online business for $XXk and use that as a deduction (while trying to turn it into income)?
-Something charity related?
-File state taxes in December to get the federal deduction this year?
-Quit/Pause my job until 2019 since my income is essentially super taxed this year? Am I thinking about that right??

Any feedback on these or better ideas? There are 3 months to go this year and I'm open to anything; I just really don't know what to do.

Super grateful for any help.

seattlecyclone

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Re: strategies to mitigate taxes on a windfall?
« Reply #1 on: September 23, 2018, 02:11:02 PM »
You sold the stock, you owe the tax. There really isn't any way around that now that the sale is done.

Now would be a fine time to realize any deductible capital losses. If you haven't yet invested the cash you received from the sale of this stock, get on that now.

Sell my place this year and use that 100k loss as a deduction - but apparently this is disallowed by the IRS. :( Any creative ways to leverage this loss?
As you note, you may not deduct capital losses from your primary residence.

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-Put in ~15k worth of repairs/upgrades into my place, which I can deduct if I rent it out? Or some other rental strategy..?
If you convert the home to a rental you would be able to deduct some repair expenses, but you'd first have to move out into a different place. Seems like a lot to squeeze into the last three months of the year, just to save a couple grand in taxes. I guess if you were planning to rent out your current condo in the next few years anyway, there might be some marginal advantage to doing it in this very high income year.

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Buy an online business for $XXk and use that as a deduction (while trying to turn it into income)?
I wouldn't expect that the purchase price of an operating business would be a deductible expense. That sounds more like an investment than an expenditure.

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Something charity related?
If you had donated the shares prior to selling them, you would have been able to deduct the entire value of the donated shares. Since you already sold them this is no longer an option. Donating cash to a charity could lower your taxes if it pushes you over the line for itemized deductions.

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File state taxes in December to get the federal deduction this year?
I thought I heard they were banning the practice of deducting early payments for taxes due in a future year, but I could be wrong about that. My state doesn't believe in income tax so it's not too relevant to me.

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-Quit/Pause my job until 2019 since my income is essentially super taxed this year? Am I thinking about that right??

I don't think you're thinking about this right. The long-term gains go on top of the regular income tax. You're taxed the same on the job income whether you have a capital gain or not. What could happen, only if your capital gains income goes across bracket lines (i.e. some is taxed at 15% and some is taxed at 20%), is that reducing your job income by $1,000 would move $1,000 of that 20% capital gains into the 15% bracket. Would you decide that spending your time going to work was no longer worth the effort if your taxes went up by 5%? Maybe, but likely not.

MDM

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Re: strategies to mitigate taxes on a windfall?
« Reply #2 on: September 23, 2018, 07:59:56 PM »
-Net worth 1.4M (mostly in the stock market, aside from windfall); maxing out 401k and IRA, HSA.
If you have any lots in a taxable account with an unrealized loss, sell them to take the losses and offset the windfall gains.

MustacheAndaHalf

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Re: strategies to mitigate taxes on a windfall?
« Reply #3 on: September 26, 2018, 07:20:23 AM »
Have you heard of "donor advised funds" (DAF)?

You can donate appreciated stock (which you held 366 days or longer) into a DAR, and in the year of the donation you can subtract taxes.  Donating stock means you don't sell the stock - it gets donated as is, without realizing the capital gains.

You can decide how quickly to send donations from the DAR to charities.  You can't benefit from these donations - that would violate IRS rules.  But you could donate $5,000 into a DAR, and then send $1,000 per year to charities of your choice.  (You can also select how the DAR assets get invested in the meantime, so it could be more or less than $5,000 by the time you've finished).  I picked $5,000 because that's the minimum donation to setup a Donor Advised Fund at Fidelity or Schwab.

Might be worth a look, to realize taxes now while you have an income - especially if you plan to quit soon.

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Re: strategies to mitigate taxes on a windfall?
« Reply #4 on: September 27, 2018, 11:32:25 AM »
Have you heard of "donor advised funds" (DAF)?

You can donate appreciated stock (which you held 366 days or longer) into a DAR, and in the year of the donation you can subtract taxes.  Donating stock means you don't sell the stock - it gets donated as is, without realizing the capital gains.

You can decide how quickly to send donations from the DAR to charities.  You can't benefit from these donations - that would violate IRS rules.  But you could donate $5,000 into a DAR, and then send $1,000 per year to charities of your choice.  (You can also select how the DAR assets get invested in the meantime, so it could be more or less than $5,000 by the time you've finished).  I picked $5,000 because that's the minimum donation to setup a Donor Advised Fund at Fidelity or Schwab.

Might be worth a look, to realize taxes now while you have an income - especially if you plan to quit soon.

Agree with this.  I had a very unusually high income year with my business and put $100k in a DAF.  Not only was the deduction worth a ton as I was in the highest tax bracket, but contributed to it with stock that had my highest percentage of capital gains to wipe those out as well (which you could also do if you still have other appreciated assets out there with significant gains).  Did it with Vanguard and was extremely simple.

The plan is to not use this money to make charitable donations from until after FIRE, when the donations will be worth zero to me tax-wise anyway.  So basically I created a $100k fund that truly only cost me about half of that, and given I hope to be FIREd for many decades I would have planned on giving away at least that much anyway so nothing lost and kinda helps in forcing the budgeting of FIRE contributions.  Given your stated financial details and the fact you brought up charity as an option I suspect this might be a good move for you to consider as well.

secondcor521

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Re: strategies to mitigate taxes on a windfall?
« Reply #5 on: September 30, 2018, 04:14:51 PM »
It's too late for the OP, but in general, the best strategy to mitigate taxes is to plan first and act second, not act first and plan second.

Also - again too late for the OP but maybe helpful for others finding this thread in the future - realizing the windfall across two or more tax years generally would result in lower overall taxes.  So if the OP had sold half in December and the second half in January that probably would have worked out better.

To the OP, if I woke up in your shoes I would set aside the money to pay the taxes in a safe place, invest the rest according to my planned AA, and pay the taxes come next April.

I wouldn't even realize capital losses to offset against the gains.  Realizing capital losses offset capital gains, but that means you only save income taxes at your capital gains marginal rate.  I'd rather realize capital losses to offset ordinary income, because then I save income taxes at my ordinary income tax rate, which is a larger savings.

Goldielocks

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Re: strategies to mitigate taxes on a windfall?
« Reply #6 on: October 08, 2018, 12:18:47 AM »
OP, I was able to do a couple of things:

1) I took a 3 month leave of absence, instead of my 4 weeks of vacation.   I wanted an extended leave, anyway.   The vacation ended up being paid out /taken in the following year, reducing my current year income.

2)  I was able to defer receiving my work bonus until the first week of January, by asking my employer.

3)  I max'd out my RRSPs, (similar to a IRA) and I should have realized my capital losses (except that I did not have much non-registered at that time).

sfsellin

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Re: strategies to mitigate taxes on a windfall?
« Reply #7 on: October 25, 2018, 12:00:33 AM »
@seattlecyclone - I think the website purchase OP is
 referring to is under Section179 for depreciating the asset fully in year one.