Author Topic: Dealing with large, single-year tax burden  (Read 6016 times)

MrPink

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Dealing with large, single-year tax burden
« on: August 04, 2015, 11:59:57 AM »
A couple of years ago, the company I work for gave me some shares.  We are a small S corp.  I became vested this year and now have to consider the value of the shares as income.  I went to TurboTax and using last year's return, tried to estimate our additional tax burden for this year.  It looks like we'll be facing about $15k in Fed and another $2k in state taxes.  We could put more into our 401k or HSA but that only decreases our AGI, effectively only giving us our tax bracket rate * what we put in. 

I currently drive a 1995 Corolla with 160k miles.  I use it to commute to work mostly and until now have felt no great need to go newer except for safety considerations.  I like not having payments :)   

However, I'm thinking now about how to deal with this large tax burden.  One way that I have been running numbers for has been the purchase of an electric vehicle since you get tax credits at both the federal and state levels.  I compared expenses for insurance and gas and included what I would get if i sell my old car. I chose to do this over a five year window.  Here are the two current scenarios I have:

1 - Pay tax bill outright and do nothing else -
  • -$17k tax bills
  • Total = -$17k
2 - Purchase Leaf, get tax credits, sell Toyota -
     
  • -$27.3k car
  • -$17k tax bills
  • $9.5k tax credits
  • -$2.5k additional insurance
  • $4.8k gas savings
  • $1k from sale of car
  • Total = -$31.5k

So in the end, I'm paying $14.5k for a new car over five years in this scenario.  In my mind, this looks like I should just pay the bills and continue driving my Toyota.  Is my logic sound? 

Are there other ways of dealing with the additional tax burden?   

Thanks for any advice. 

johnny847

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Re: Dealing with large, single-year tax burden
« Reply #1 on: August 04, 2015, 12:14:33 PM »
You should just pay the tax bill.

Step back for a second and look at what you just proposed. You've proposed to deal with a one time large expense by buying a new car? So you're going to solve a large expense with another large expense?

No. Absolutely not.
(Ok yes there is the lower operating cost going forward, but that's going forward. You need money now (ok, technically by 4/16, but close enough compared to the sum of money required to pull off your plan)).

dandarc

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Re: Dealing with large, single-year tax burden
« Reply #2 on: August 04, 2015, 12:15:53 PM »
So, unless you're in the lower tax brackets already, maxing the 401K and HSA, and traditional IRAs (if you can deduct the contribution) seem like a no-brainer, if you've got the money to do so, regardless of what you do with the car.

One thing absent from your analysis is repairs.  You'd think the '95 corolla would be more expensive than a brand-new leaf on that front.  By how much I don't know.

And will the Corolla last another 5 years?  With only 160K miles on it, I'm thinking yes, but there is a decent possibility that a major problem comes up and you'll need to get another car anyway.

Finally, does the Leaf fully meet your needs?  In-town, commute and errands sure.  Do you drive outside of the vehicles range from time to time?  How often?  How expensive would alternative transportation be when your leaf can't do the job for whatever reason?

Any way, not trying to make a recommendation, but just list some things to think about.

Papa bear

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Re: Dealing with large, single-year tax burden
« Reply #3 on: August 04, 2015, 12:36:14 PM »
Adding unnecessary expenses to save on taxes is like being excited about flushing a dollar bill down the toilet to get 2 dimes and a nickel thrown back.   

However, if you need to spend for an expense anyway, then do your best to maximize a tax benefit.


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MrPink

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Re: Dealing with large, single-year tax burden
« Reply #4 on: August 04, 2015, 12:37:36 PM »
Yes, it did sound a bit crazy as I was writing it.  Thanks for putting it bluntly, Johnny.  I had all these things scattered around my notebook and as I was finally putting everything together it wasn't making much sense to go for the car.  As much as I hate car payments, my thinking had been if there ever was a time to do it, this would be it. 

Its been a few years since anyone was awarded shares in the company and the tax bills back then were about a magnitude lower and much easier to pay off. 

MrPink

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Re: Dealing with large, single-year tax burden
« Reply #5 on: August 04, 2015, 12:42:45 PM »
Does your car have any maintenance issues?  I'm impressed that it's 20 years old.  That's awesome.

I don't see the ROI in a new electric car at this time.  You have to factor in battery replacement costs if you are claiming to save money on fuel.  You would probably do better by buying a used gas car that's 5-10 years old.

As for your company shares, you could ask around to people in similar situations in your company about what they did, or consult a tax attorney.  But if you aren't maxing out your HSA and 401k you probably should do so regardless, assuming you have enough income to support your lifestyle, as you will likely pay less in taxes in your early retirement than you do now as a highly priced employee.

No major maintenance issues with the car.  I've had it for 10 years now and put AC, a new starter, and rear springs on the back.  All in all, I've been quite pleased with it.  My brother is a mechanic and helps keep expenses down. 

Quote
Finally, does the Leaf fully meet your needs?  In-town, commute and errands sure.  Do you drive outside of the vehicles range from time to time?  How often?  How expensive would alternative transportation be when your leaf can't do the job for whatever reason?
The Leaf would meet the needs.  I don't drive my car more than 40 miles at a time.  We have a van for longer trips. 
« Last Edit: August 04, 2015, 12:44:57 PM by MrPink »

forummm

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Re: Dealing with large, single-year tax burden
« Reply #6 on: August 04, 2015, 12:43:51 PM »
What's your tax bracket now?

I'm a fan of electric cars and they can be the cheapest way to deal with transportation. But you should decouple that from your tax bill issue. The only way I can see them being linked is if your total federal income tax is normally too low to make use of the full $7500 tax credit, and the finances would tip your decision in favor of buying the electric car if you could use the full credit (as you would be able to this year). But this is unlikely to be the case.

MrPink

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Re: Dealing with large, single-year tax burden
« Reply #7 on: August 04, 2015, 12:51:11 PM »
What's your tax bracket now?

I'm a fan of electric cars and they can be the cheapest way to deal with transportation. But you should decouple that from your tax bill issue. The only way I can see them being linked is if your total federal income tax is normally too low to make use of the full $7500 tax credit, and the finances would tip your decision in favor of buying the electric car if you could use the full credit (as you would be able to this year). But this is unlikely to be the case.

We will span the 25/28% bracket this year.  This past year our AGI was right around $120k and our tax bill was $7.8k.

Candace

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Re: Dealing with large, single-year tax burden
« Reply #8 on: August 04, 2015, 01:00:04 PM »
Is there a market for the shares? Are they publicly listed? Could you possibly sell some to pay the taxes? You said the company was a small S Corporation, so I'm guessing not.

You should talk to a tax professional. But if there's no way to sell the shares, then you may be in a position where they can be valued at zero for tax purposes.

Mississippi Mudstache

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Re: Dealing with large, single-year tax burden
« Reply #9 on: August 04, 2015, 01:04:52 PM »
The only way I can see them being linked is if your total federal income tax is normally too low to make use of the full $7500 tax credit, and the finances would tip your decision in favor of buying the electric car if you could use the full credit (as you would be able to this year).

This is exactly what I was thinking.

I'm very tempted by electric cars for our next purchase (2+ years from now), but unless I get a significant raise, I don't foresee owing any income tax for years to come. In fact, I expect to get nearly the full EITC for the 2015 tax year. However, a big one-off tax bill like I had last year could definitely swing the calculator in favor of the electric vehicle. The timing would have to be just right, though.

MrPink

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Re: Dealing with large, single-year tax burden
« Reply #10 on: August 04, 2015, 01:27:17 PM »
Is there a market for the shares? Are they publicly listed? Could you possibly sell some to pay the taxes? You said the company was a small S Corporation, so I'm guessing not.

You should talk to a tax professional. But if there's no way to sell the shares, then you may be in a position where they can be valued at zero for tax purposes.
There is no market for these shares other than to current shareholders.  I could sell some back to the company if necessary.

jwright

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Re: Dealing with large, single-year tax burden
« Reply #11 on: August 06, 2015, 11:42:12 AM »
Is there a market for the shares? Are they publicly listed? Could you possibly sell some to pay the taxes? You said the company was a small S Corporation, so I'm guessing not.

You should talk to a tax professional. But if there's no way to sell the shares, then you may be in a position where they can be valued at zero for tax purposes.
There is no market for these shares other than to current shareholders.  I could sell some back to the company if necessary.

How are the valuing the shares?  I've seen a privately owned small Corp doe this very incorrectly, so I'd make sure everyone was on the same page with a CPA and tax attorney.

forummm

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Re: Dealing with large, single-year tax burden
« Reply #12 on: August 06, 2015, 01:39:38 PM »
What's your tax bracket now?

I'm a fan of electric cars and they can be the cheapest way to deal with transportation. But you should decouple that from your tax bill issue. The only way I can see them being linked is if your total federal income tax is normally too low to make use of the full $7500 tax credit, and the finances would tip your decision in favor of buying the electric car if you could use the full credit (as you would be able to this year). But this is unlikely to be the case.

We will span the 25/28% bracket this year.  This past year our AGI was right around $120k and our tax bill was $7.8k.

So the electric car decision should be made separately from your potential tax issue.

Candace

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Re: Dealing with large, single-year tax burden
« Reply #13 on: August 07, 2015, 11:00:43 AM »
Is there a market for the shares? Are they publicly listed? Could you possibly sell some to pay the taxes? You said the company was a small S Corporation, so I'm guessing not.

You should talk to a tax professional. But if there's no way to sell the shares, then you may be in a position where they can be valued at zero for tax purposes.
There is no market for these shares other than to current shareholders.  I could sell some back to the company if necessary.

How are the valuing the shares?  I've seen a privately owned small Corp doe this very incorrectly, so I'd make sure everyone was on the same page with a CPA and tax attorney.

I think this is key for the OP. His problem may not really be a problem at all.

MrPink

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Re: Dealing with large, single-year tax burden
« Reply #14 on: August 10, 2015, 03:11:27 PM »
Is there a market for the shares? Are they publicly listed? Could you possibly sell some to pay the taxes? You said the company was a small S Corporation, so I'm guessing not.

You should talk to a tax professional. But if there's no way to sell the shares, then you may be in a position where they can be valued at zero for tax purposes.
There is no market for these shares other than to current shareholders.  I could sell some back to the company if necessary.

How are the valuing the shares?  I've seen a privately owned small Corp doe this very incorrectly, so I'd make sure everyone was on the same page with a CPA and tax attorney.

I think this is key for the OP. His problem may not really be a problem at all.
Share value is assessed by our accounting firm using generally accepted accounting practices.  They have done this several times now for us, usually about every three years.  So as to the question of being able to write them down to zero for tax purposes is not possible especially since assets, profits, and sales have all increased since the last valuation.  Of course, this means that there is some additional immediate equity for which we don't have to pay tax on. 

We have the cash to pay the tax bill, we just don't like depleting our emergency fund that much.  It does seem to make sense now that we should separate the tax bill from the electric vehicle purchase, especially if we can be sure that our tax burden in another year or two will be larger than $7500.  We'd be likely to lose the state incentive by that point but that isn't as much of a concern.   

TomTX

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Re: Dealing with large, single-year tax burden
« Reply #15 on: August 14, 2015, 08:55:36 PM »
Does your car have any maintenance issues?  I'm impressed that it's 20 years old.  That's awesome.

I'm commuting in a 1995 Saturn SL1, with over 260k miles. That's an Old GM(ish) product. Only major issue is air conditioning. I've been just badassing my way through these recent 100+ degree days. Not bad driving in before 7AM. Drive home is quite warm... ;)

jwright

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Re: Dealing with large, single-year tax burden
« Reply #16 on: September 16, 2015, 09:55:07 AM »
Is there a market for the shares? Are they publicly listed? Could you possibly sell some to pay the taxes? You said the company was a small S Corporation, so I'm guessing not.

You should talk to a tax professional. But if there's no way to sell the shares, then you may be in a position where they can be valued at zero for tax purposes.
There is no market for these shares other than to current shareholders.  I could sell some back to the company if necessary.

How are the valuing the shares?  I've seen a privately owned small Corp doe this very incorrectly, so I'd make sure everyone was on the same page with a CPA and tax attorney.

I think this is key for the OP. His problem may not really be a problem at all.
Share value is assessed by our accounting firm using generally accepted accounting practices.  They have done this several times now for us, usually about every three years.  So as to the question of being able to write them down to zero for tax purposes is not possible especially since assets, profits, and sales have all increased since the last valuation.  Of course, this means that there is some additional immediate equity for which we don't have to pay tax on. 

We have the cash to pay the tax bill, we just don't like depleting our emergency fund that much.  It does seem to make sense now that we should separate the tax bill from the electric vehicle purchase, especially if we can be sure that our tax burden in another year or two will be larger than $7500.  We'd be likely to lose the state incentive by that point but that isn't as much of a concern.

Just out of curiosity, are they including a discount for lack of marketability? 


kkbmustang

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Re: Dealing with large, single-year tax burden
« Reply #17 on: September 21, 2015, 11:55:56 PM »
Just as FYI, see these:

End of article about lapse of restrictions and whether it's a taxable event.

http://www.irs.gov/Businesses/Corporations/Equity-Stock-Based-Compensation-Audit-Techniques-Guide

And here is a section discussing calculation of FMV for purposes of identifying value for tax purposes, if you're so inclined to dig through it.  http://www.irs.gov/irb/2007-19_IRB/ar07.html#d0e1777

MrPink

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Re: Dealing with large, single-year tax burden
« Reply #18 on: October 02, 2015, 05:38:41 AM »
Just out of curiosity, are they including a discount for lack of marketability?

No discount for lack of marketability because the company could buy the shares back at the valuation if I wanted. 

MrPink

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Re: Dealing with large, single-year tax burden
« Reply #19 on: October 02, 2015, 05:43:23 AM »
Just as FYI, see these:

End of article about lapse of restrictions and whether it's a taxable event.

http://www.irs.gov/Businesses/Corporations/Equity-Stock-Based-Compensation-Audit-Techniques-Guide

And here is a section discussing calculation of FMV for purposes of identifying value for tax purposes, if you're so inclined to dig through it.  http://www.irs.gov/irb/2007-19_IRB/ar07.html#d0e1777

These are quite interesting.  They confirm that this is a taxable event since there has been full transfer of ownership.