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socrateaser
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 34141
Experience:  Retired (mostly)
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Is there anyone that can answer questions on income with regards

Customer Question

Is there anyone that can answer questions on income with regards XXXXX XXXXX W-2 Employee that might receive millions as ordinary income based on sale of small company?
Submitted: 1 year ago.
Category: Business Law
Expert:  socrateaser replied 1 year ago.
Hello,

Please ask your questions, and I will be happy to answer.

Thanks in advance.

Notice: If you need to contact me again, please put my user id at the beginning of your question ("To Socrateaser"), and the system will send me an alert. Please Click the following link for IMPORTANT LEGAL INFORMATION. Thanks and best wishes!

Customer: replied 1 year ago.

To Socrateaser


 


I am a W-2 Employee for a software company "privately held" My question is: There is a chance I will receive millions of dollars on the sale of the company. My shares would be allocated prior to the sale. I am just wondering if there is anything I can do from a tax perspective?

Expert:  socrateaser replied 1 year ago.
Hello again. I wasn't expecting to hear from you again after so long.

Will your receipt of the money be in exchange for selling your share of ownership in the company, or paid as services rendered/wages/salary?

Thanks in advance.
Customer: replied 1 year ago.

I believe I will be given shares prior to sale and those immediately converted to cash. What would be better and why?

Expert:  socrateaser replied 1 year ago.
1. If you receive shares in the corporation, your basis will be what you paid for them on the date of receipt. When you sell them to the buyer, you will have a capital gain of effectively 20% of the profit, plus 4.35% Michigan state income tax.

2. If you are paid for personal services, instead, you will pay ordinary income tax at your marginal tax rate, which will be 39.6% of every dollar in excess of $400,000. You will also pay 6.2% FICA on the first $113,700, and 1.45% SECA on the entire profit. And, you will pay 4.35% Michigan state income tax.

3. If you move to Nevada, or some other state that has no state income tax, then you will avoid the 4.35% state income tax.

4. If you move outside of the USA, and you are paid for personal services, rather than in stock, then you will avoid all federal tax on the first $97,600, and the 4.35% state sales tax.

5. If you move outside of the USA, and you relinquish your U.S. Citizenship, and you are paid for personal services, then none of your income is taxable to the federal or state government, because: (1) under IRC 877A, expatriates who relinquish citizenship are obligated for taxes on all of their assets as if liquidated on the day before they relinquish citizenship (but, you won't have any assets from the corporation on the date before you relinquish citizenship); and (2) nonresident aliens are taxed for personal services based upon the place where those services are rendered, and that place will be outside the USA.

BotXXXXX XXXXXne, if you are really about to make a large fortune on which you could live comfortably for the remainder of your lifetime, then you may want to seriously consider becoming a permanent resident of a foreign nation that has a low or nonexistent personal income tax (e.g., Cayman Islands). You'll be a tourist to the USA for the rest of your life, but you will also avoid all of the taxes that you would ordinarily have had to pay.

That about covers all the creative options. Hope this helps.
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 34141
Experience: Retired (mostly)
socrateaser and other Business Law Specialists are ready to help you
Customer: replied 1 year ago.

Thanks so much for the answer, and I did rate you as excellent. I left out one important factor. I will not receive the stock until shortly before the sale, which I assume, screws me on the tax situation. This would be short term gain instead of long term gain since it is under 3 years?


 


What would that look like and any suggestions??

Expert:  socrateaser replied 1 year ago.
Short term gain is based on any capital asset held for less than one year. So, yes, you would be screwed. The best you could do would be to relocate to a different state before the sale and avoid any local capital gains tax.

Hope this helps.
Customer: replied 1 year ago.

Can you tell me the exact taxes for fed/state then? Please thanks.

Expert:  socrateaser replied 1 year ago.
There's no way to compute your taxes without actually preparing a tax return, so that all of your various income, expenses, exemptions, exclusions, deductions and credits are accounted for. The best thing to do is to use one of those online tax preparation services (hrblock.com; turbotax.com; taxact.com, etc.), and create a pro forma tax return for yourself. Then you will know exactly what you will owe.

Best wishes.
Customer: replied 1 year ago.
I have turbo tax. What would I input into stick sale?
Ill pay zero. I can come up with worth and sale price.
Expert:  socrateaser replied 1 year ago.
On Schedule D, enter $0 as the cost basis and your net proceeds from the sale as the sales price. That's all you have to do.

Hope this helps.
Customer: replied 1 year ago.

Last question for now., and I will be tipping.


 


How soon do I have to create a new "residence" address in a new state to be legal?

Expert:  socrateaser replied 1 year ago.
The question of residency for tax purposes requires: (1) a physical domicile in a specific jurisdiction; and (2) the intent to reside therein for an indefinite period of time.

The state tax authorities (and a court, if it ever were to get that far) look at objective manifestations of residency (drivers license, vehicle registration, fixed-term apartment lease, legal title to real property, voter registration, kids enrolled in school, etc.). You need to establish residency before your right to receive cash in exchange for the stock becomes vested (i.e., at the instant that you agree to transfer your stock in exchange for cash, whether orally or in writing).

Hope this helps.

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