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PDtax
PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 1869
Experience:  Tax professional and business consultant for 32 years.
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I will receive money from the sale of "phantom stock" it will

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I will receive money from the sale of "phantom stock" it will be considered part of my income. It will be in the neighborhood of $350k. I am looking for ways to help with taxes, of course I would like to keep as much as possible. It is being wired to me by a Swedish company and I will be responsible for setting up taxes etc. Would buying a business or setting up a LLC help and how? How could I keep as much of the money as possible? My annual base salary is $147,000 in addition to the bonus add to that my wife's salary of $90,000 and we are not eligible for some of the regular tax breaks. We have 4 children if they would factor into the ideas. Many thanks.
Submitted: 8 months ago.
Category: Finance
Expert:  PDtax replied 8 months ago.

PDtax :

Welcome to the site. I'm PDtax, and will be helping you today.

PDtax :

Hi from Just Answer. Can you tell me about the phantom stock, are you being paid in cash or shares?

Customer:

Cash

Customer:

wired into my account like income

PDtax :

And the income is to be treated as compensation or long term capital gain?

Customer:

compensation

PDtax :

without withholdings, so it's ordinary income to you. Ok.

Customer:

already maxed out 401K

PDtax :

Do you have transfer rights? Can you direct the payment to another entity?

Customer:

The money is from the sale of an American company that I work for to an overseas company in Sweden. They money is due to imaginary stock that the owner gave the executive team. Not a real stock

Customer:

I don't know

Customer:

I would imagine not as the equity in the company is because of my service

PDtax :

I know. It allows companies to compensate like ISO's without issuing stock or diluting ownership.

PDtax :

So your income is all US source. I would consider gifting or transfering some of your payment stream to another entity, like a trust. If that doesn't work, I might consider a charitable remainder trust, or CRT, to be funded with some of the funds if they must come to you. A foundation is another possibility.

PDtax :

If you could divert some payments before they come to you, you would escape the tax personally, and tax advantage of lower brackets in the transfer entity.

Customer:

it will be one lump payment in the next few weeks

PDtax :

If you have to take all of the income personally, a charitable trust would allow you to establish a charitable donation for perhaps the earnings on the cash donation, and have the cash principal returned to you lears later. You get a current tax deduction based on present value, and the cash is yours years later.

PDtax :

Funding 529 college plans with a portion is a way to get some tax deduction and allow time to make the tuition deposit grow. Four college tuitions might be a sixable sum when it's time, and your income means you will likely be funding most of those tuition bills.

Customer:

aren't 529 plans in nc for public schools only?

Customer:

how would a foundation work? sorry I am very new to this

PDtax :

I didn't know the state, but I can't believe that NC 529 funds couldn't be used for private colleges in the state. They are likely limited to the state, though.

PDtax :

foundations are often used by athletes to divert some of their earnings. Once contributed for the tax deduction, often times family members are hired to work for the foundation and its charitable purpose. The result is you get a tax deduction for the initial funding, and family or children get tax-deductible jobs.

PDtax :

Setting up a business doesn't get an initial tax deduction this year, which you will want.

PDtax :

There are tax credit investments that might help, in low-income housing partnerships, for example. You buy a piece of the partnership, and tax credits are passed out to you. That's normally a stream of tax credits though, and not a big enough number in year 1 to make a big difference. Just a thought.

Customer:

crt how does that work?

Customer:

I am assuming a lawyer would need to set all of these up?

PDtax :

The charitable trust is established, and you contribute cash. Your tax deduction can be based on that amount, and you get income from the trust. Or, you contribute cash, and you get a tax deduction for the earnings at present value, and you get a return of your funds in 10 years.

PDtax :

A tax attorney and CPA will be worth their weight in gold to you this year.

Customer:

so would the charitable trust need to be linked to an existing charity or am I missing something?

PDtax :

yes.

Customer:

which do you see as the most beneficial of these options?

Customer:

and the easiest?

PDtax :

I would consider paying off your home and car and personal mortgage debt. I like the feeling of being debt free.

Customer:

I only owe 30,000 on home, less than 10000 on vehicles and no other debt...we don't live large

PDtax :

I would consider paying for the college contributions through a 529 plan, or at least some of the cash you will need. Doing it now will let the value grow.

PDtax :

I don't know your ages or health, so term life insurance might be a good idea.

Customer:

42...good health...I have 740,000 policy and wife has 3x annual salary in policies

PDtax :

Saving some taxes through a trust would work very well too, depending on your net worth. If your retirement is on track.

Customer:

as you said set up trust for a charity?

Customer:

then how do I get the funds back in 10 year?

PDtax :

The trust is funded by you, and income distributed out to the charity. The trust has a term, after which it is dissolved and the principal returned to you. Your attorney will help craft the document.

Customer:

so I could theoretically put all the amount into a trust tax free? have the income go to an animal shelter etc that has tax deductible status and at the end of the term the money is returned to me...then I worry about the taxes then too?

Customer:

so in order of your suggestions:

Customer:

pay all debt off

Customer:

fund 429 plans for 4 kids to max allowable

Customer:

fund a charitable trust

PDtax :

The trust I am referring to is a charitable lead trust. Sorry for the confusion.

PDtax :

The phantom stock income comes to you. income added to 1040.

Customer:

so any tax attny will know what to do if I say set up charitable lead trust

PDtax :

You pay out what you will, not reducing income but debt service.

Customer:

debt service?

PDtax :

You contribute to 529 plans for tax deductions for tuition payments. You may consider prepaying tuition that might get current tax benefits.

PDtax :

You then contribute cash to a charitable lead trust. You get a tax deduction for the present value of the earnings over a 10 year period, reducing your taxes now as a charitable deduction.

PDtax :

The trust pays out income to the charities of your choosing.

PDtax :

When the trust dissolves, the remaining cash is returned to you.

PDtax :

Again, a meeting with quality tax professionals is vital. My suggestions are just that, starting points for you to consider when you consult with your advisors.

PDtax :

If thsi answers your questions, please leave positive feedback. I'm PDtax.

PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 1869
Experience: Tax professional and business consultant for 32 years.
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