Question: minimizing taxes on a book advance

[GUNDERSON]

[removed]

[seattlecyclone]

I wouldn't necessarily pay the agent up front. You'd be accelerating a $30k payment by two or more years, and your tax brackets probably won't be all that different between 2019 and 2021. If you're single and taking the standard deduction, $165k (after subtracting $15k agent fee from the $100k signing part of your advance) puts you solidly in the 24% bracket, while 85% of $60k puts you right around the border between the 12% and 22% bracket. Any chance you'll pick up some other work in the meantime to push your 2021 income up? Take that into account too. I think you have a good chance of doing better investing the money rather than giving it to your agent up front just to save 2-12% in two or more years.

This year, consider opening a solo 401(k) if you don't already have one and contribute as much as you can afford. Also if you have any charitable ambitions now might be a good time to start a donor advised fund. You get to take the tax deduction for your full charitable contribution in the year you move the money to the DAF, while the money can be distributed to actual charities over a longer period of time.

Beyond that, congrats on your book deal!

[TomTX]

Do you need the cash now? You could ask them to pay you the signing bonus on January 1, 2020. Waiting less than 3 months.

That would mean your income would look like

2019: $80k + whatever additional work
2020: $100k  + whatever additional work (less 'cause you're mostly working on this book, right?)
2021: $60k + whatever additional work.

[GUNDERSON]

That would be ideal (pushing the advance back) but is unfortunately not an option!

[TomTX]

That would be ideal (pushing the advance back) but is unfortunately not an option!

Bizarre. Most companies would be thrilled at being able to delay payment. I can (maybe) understand not wanting to split up the advance.

[jeroly]

If you are at $80k + $100k - $15k = $165k then after standard deduction (assuming single) you're at $153k which puts you in the 24% marginal tax bracket. Even if you split it up somehow, you'd be in the 22% bracket and pay just 2% less on the last $69k, difference of only $1400 or so. Doesn't seem worth it to sweat it too much... certainly doesn't seem worth paying $30k in commissions years early to save 2% on that 30k!

[TomTX]

If you are at $80k + $100k - $15k = $165k then after standard deduction (assuming single) you're at $153k which puts you in the 24% marginal tax bracket. Even if you split it up somehow, you'd be in the 22% bracket and pay just 2% less on the last $69k, difference of only $1400 or so. Doesn't seem worth it to sweat it too much... certainly doesn't seem worth paying $30k in commissions years early to save 2% on that 30k!

Your explanation seems to misunderstand how tax brackets work.

[GUNDERSON]

How so?

[seattlecyclone]

If you are at $80k + $100k - $15k = $165k then after standard deduction (assuming single) you're at $153k which puts you in the 24% marginal tax bracket. Even if you split it up somehow, you'd be in the 22% bracket and pay just 2% less on the last $69k, difference of only $1400 or so. Doesn't seem worth it to sweat it too much... certainly doesn't seem worth paying $30k in commissions years early to save 2% on that 30k!

Your explanation seems to misunderstand how tax brackets work.

How so?

It ignores that you're paying much less than 22% on the first many dollars of income. Unless you have plans for some other income in 2020 that you didn't mention, convincing them to pay you your $100k (minus agent fees) in January instead of now would save you more than 2%.

Status quo, getting $165k in 2019 and nothing in 2020 (assuming single tax rates):
* Gross income: $165,000
* Taxable income after standard deduction: $152,800
* Federal income tax: $30,846.50
* Tax bracket: 24%
* Effective tax rate (tax / gross income): 18.7%

Hypothetical movement of $85k (advance minus agent fee) into 2020:
* Gross income: $80,000 in 2019, $85,000 in 2020
* Taxable income: $67,800 in 2019, $72,800 in 2020
* Federal income tax: $10,780 in 2019, $11,880 in 2020
* Tax bracket: 22% in both years
* Effective tax rate: 13.5% in 2019, 14.0% in 2020, 13.7% overall

Note that in 2019 before the advance you're already on the hook for $10,780 in taxes, while the advance adds $20k to this year's tax bill. If you could move the advance to 2020 (assuming no other income that year), you would save more than $8k in taxes, nearly 10% of the total advance.

If you do expect to get some other income in 2020, the more other income you'll have the less difference it would make to move the advance into 2020. That's why moving your agent fees from 2021 wouldn't save you that much. You're already expecting some income that year, so the difference in taxes paying it now or then isn't very high. Consider the time value of money and paying later seems like a better plan to me.

[jeroly]

Your explanation seems to misunderstand how tax brackets work.

How so?

It ignores that you're paying much less than 22% on the first many dollars of income. Unless you have plans for some other income in 2020 that you didn't mention,

[snip]
 you're going to have some other income while working on the book

I'll stand by my original assertion. He does have other income as stated in the OP.

[noplaceliketheroad]

for all the people responding with numbers minus the agent commission - new tax laws make it a lot more difficult for anyone in creative fields to deduct agent commissions, so usually someone's on the hook for taxes on the FULL amount, not just what you get after the agent takes their cut. unless you have an s-corp or similar situation set up.

[LiveLean]

I've had a number of book advances.

1. As you've learned, "advance" is a misnomer since rarely do you get more than a small percentage up front. Publishers are notoriously slow in paying. On several occasions, I've held back on delivery of the manuscript, on the advice of agent, since the publisher had yet to pay the "on signing" portion of the advance. (In other words, I'd written the whole book before getting a penny of the "advance.")

2. The agent's 15 percent comes out of each payment, which might come over 12 to 24 months. Why pay him/her 100 percent upfront? I'm sure they'd be thrilled, but that makes no sense.

3. Back when book advances and payments were an annual thing for me -- congrats on getting $300K in this marketplace, BTW -- I would purposely ask my agent if we could take the next payment in early January, thus the next tax year. I do this with my other writing, too, sometimes waiting to send an invoice for November or December work until January. Sure, you're paying quarterly taxes and it's not like you're moving up a tax bracket, but why owe more sooner than you have to?