Hello XXXXX,
Income Averaging was a wonderful tax option for people in a position like your parents, but unfortunately the IRS did away with Income Averaging a number of years ago. It is currently only available to people in the fishing and farming industries, due to the impact that the climate can have on the income from those occupations.
The only thing they might consider is to take half of the money now in 2009 and then the other half in 2010. I am assuming from the figures that you provided that their normal income is around $55,000. So if they take $62,000 each year (2009 and 2010) then they would have income of $117,000 each year. This will help keep them in a slightly lower bracket, and is really the only option, other than to simply take smaller payments over a number of years.
I will be leaving the forum very shortly, but if you have any follow up questions, feel free to post them here and I will follow up later this everning or first thing in the morning.
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Thank you XXXXX
Accountant
25+ years tax consulting. Specializing in returns for US citizens living abroad