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My husband is getting $500,000 from an old boss that sold his

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company about 3 years ago...
My husband is getting $500,000 from an old boss that sold his company about 3 years ago. It was a verbal agreement that he would get a percentage of the company when finalized. He got $250,000 about 3 yrs ago and most went to taxes. Now he is to get about $500,000 and we wnat to know if there is some way to avoid heavy taxes?
Submitted: 7 years ago.Category: Tax
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11/2/2010
Tax Professional: Jacy, Certified Public Accountant (CPA) replied 7 years ago
Jacy
Jacy, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 568
Experience: Nine years individual income tax preparation and consulting
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Hello,

 

The tax rate on income depends on what type it is. In your case, it is for the sale of his business. The amount paid by the buyer for each type of business asset is supposed to be reported to the IRS on Form 8594. If this income is classified as from the value of the "Goodwill" of the company, it is subject to ordinary income tax rates.

 

You cannot call this a Gift unless the giver signs a document to the effect and files a Gift tax return. The buyer of this business will not want to do this since he then cannot deduct this cost from his taxes.

 

If you arrange to collect the funds in installments over several years, then your tax rate may be lower. The risk in doing this is that we do not yet know what tax rates will be for the coming years. This year the top rate is 35%.

 

Hope this is helpful to you. Please click Reply if I can help you further.

 

Thank you!

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Customer reply replied 6 years ago

If the buyer files the Form 8594, what type of taxes would we pay??

If this is a gift, could $13,000 be given to each in the family or is it just $13,000 total for the year

Tax Professional: Jacy, Certified Public Accountant (CPA) replied 6 years ago

Hello,

 

I have re-read your original question. At that time, I assumed that your husband sold a business. Did he actually own any of the business? Or stock in the business? Is this income really deferred compensation?

 

To figure out if this income can be classified as capital gain income, I will need to have you describe this income in more detail.

 

If some of the money is a gift, the giver can give each person $13,000 without having to file a gift tax return. If the giver is married, he and his spouse can jointly give $26,000 to each person.

 

Sorry for the confusion,

 

Jacy

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Customer reply replied 6 years ago
My husband worked for a company and the owner{Troy} sold it- there had been a verbal agreement that when it sold my husband would get 5%. This was not put in writing and it was not discussed if this was 5% of the gross sale or the net sale after all debt had been paid. At the time of the sale my husband was given $250,000 and told he would get the balance in 3 years when the deal was finalized. There was some type of clause with the new owner that there would have to be a certain profit over the next 3 years for Troy to get full payment. That time has come and now Troy wants to give us $587,000 as our share. We had to pay capital gains taxes on the first because HIS accountant said that was all he could do. We feel that there should be some way to keep the taxes at a minimum. I understand that this money is coming from Troy(he is married). Yall initially said something about the buyer filing a FORM so we would just pay normal taxes. If they did give us 26,000 a year, and $26,000 to each of our children, is that gift taxable to the reciever? Hope this helps explain.
Customer reply replied 6 years ago
I understand that this money is coming from an individual, not a business entity or trust but I can clarify that tomorrow
Tax Professional: Jacy, Certified Public Accountant (CPA) replied 6 years ago

Hello,

 

Actually, it would be better if you could classify this as capital gain income. The maximum tax rate for capital gains this year is 15%. Ordinary rates are as much as 35%.

 

For this to be a capital gain to you, it needs to be considered a sale of an investment. It would be helpful to know how the owner/Troy is accounting for his payment to you. If this income is deferred compensation, you will have to pay ordinary tax rates. Will Troy be giving you a tax reporting form of some kind? If you can find out, it will be helpful.

 

Thanks,

 

Jacy

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Customer reply replied 6 years ago
I will try and find out tomorrow. What needs to be done to classify it as capital gain income
Customer reply replied 6 years ago
Is Jacy working on a response??
Tax Professional: Jacy, Certified Public Accountant (CPA) replied 6 years ago

Hi,

 

My apologies. I thought I was waiting for more information from you.

 

There is really nothing you can do on your end to influence what type of income this is. You will need to find out from the payer (or his accountant) how he is accounting for this payment. Is he going to issue you a 1099 or some other tax form?

 

Thanks again,

 

Jacy

 

 

 

 

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Customer reply replied 6 years ago
Can you tell me if he gives me, my husband and my 3 grown children $26,000 each year as a gift do we have to pay taxes on it?
Customer reply replied 6 years ago
What is the Form 8594 that was mentioned in the first response?
Tax Professional: Jacy, Certified Public Accountant (CPA) replied 6 years ago

Hi,

 

That would be the form filed in the year of sale by both the buyer and seller of a business that allocates the purchase/sale price to each type of asset in the company. If your husband did not have any official ownership in the company, this form will not apply to him,

 

Jacy

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Customer reply replied 6 years ago
What about an answer to the question above that?
Tax Professional: Jacy, Certified Public Accountant (CPA) replied 6 years ago

Hi,

 

Sorry, I didn't see that one.

 

No, a gift received is not taxable to the recipient. Any gift tax requirements are on the giver. As long as the amount is not more than $26,000 per person per year, there is no reporting requirement for the giver and his wife.

 

Jacy

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Customer reply replied 6 years ago
Thank you I will let you know if I have any questions- do I have a final date that I can ask questions relating to this question under the original payment?
Tax Professional: Jacy, Certified Public Accountant (CPA) replied 6 years ago

Hello,

 

I will have to check on that. I don't think there is a time limit.

 

Your deposit is still in your JA account. The answer is not actually paid for until you Accept.

 

I'll email customer service and let you know if there is any time limit and get back to you.

 

Thank you,

 

Jacy

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Customer reply replied 6 years ago
Actually I did get charged $34 on my credit card so I shouldn't get charged again. Thanks for looking into it
Tax Professional: Jacy, Certified Public Accountant (CPA) replied 6 years ago

Hi,

 

The there is a 24 hour time limit before your question "closes". You can later reacivate it by hitting the "re-list" button.

 

You are right about the credit card charge on your account. However, this answer isn't actually paid for unitl you hit the accept button. This means you can us your $34 for a different question if you don't accept this answer.

 

Thanks,

 

Jacy

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