Max: I Don’t Want the Million Dollars–Now.

Max, a geek genius, has worked for a successful high-tech startup where he received potentially lucrative stock options. His pay day has now arrived: He will get $1,000,000 this year on his stock options.

Max consults his tax advisor. First, he learns that his options are “non qualified options” and will be taxed at the maximum tax rate for ordinary income and not at the lower capital gains rate. Second, the $1 million will get dumped onto his 2017 tax return, forcing him into the highest federal tax bracket, where he will experience even more tax pain caused by phase outs of tax deductions at his income class, burying him under by the piling on of the Obama Care tax, state and local taxes. His CPA estimates he will pay nearly $600,000 in combined taxes on his $1 million.

Max begs his boss to postpone the $1 million payout until next year when taxes will be lower and he will have enough time to figure out how not to lose $600,000 to taxes.  His boss says: the deal requires a payout this year. Boss to Max: “Either you take the money now or you are fired.”

He begins his search for tax deductions in 2017. Most are small: prepay some items, invest in some oil drilling or real estate deals, and accelerate some expenses. The tax code has been rigorously pruned over the years to cut out big last minute tax deductions. He only comes up with about $90,000 in tax deductions, way short of the $600,000 mark.  

Does he have other options?

Yes. There are charitable planning tools which could offset most of the $600,000. However, Max has to move on it now and close the transaction before the end of the year.

Max protests: “But I don’t know which charities I would like to leave most of the million to.” Us: “That is not a problem.  We can set it up for you to designate your own donor-advised fund to be your charity, allowing you to pick and choose a variety of qualified charities next year.”

Max says: “I would like to help others, but what do I get out of my $1 million if all or most of it goes into a fund for charity?” Answer: Max will get a competitive rate of income on earnings from his charitable gift for the rest of his life. Depending on how long he lives and the investment performance of the fund, it is likely that he will receive a lot more income than if he paid the tax. Also, depending on his other income, he may well be in lower tax brackets in future years and will have plenty of time for tax planning later, such as shifting future income into lower brackets.

Max will show the $1,000,000 on his tax return, but most of the $600,000 in potential taxes will be offset by a very large charitable deduction. And, most of the $600,000 to $1million donated to charity will produce income for Max for the rest of his life and fund his favorite causes.  

The structures are in place for this to happen before the end of 2017.  However, to determine the best strategy to take, Max has to meet with the planners now.  It takes time to run the

numbers, and that time is short.

Do you have a problem similar to Max at the end of this year?  If so, contact roger@wealthcounsellors.com or call 571-633-0330 to have lots to celebrate about later.

Roger McClure
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