How to avoid tax when taking a windfall in small chunks?
"How can I avoid this, so we are taxed as if we are making the $60k/yr that we want to receive?  You can't. In the US the income is taxed when received, not when used. If you receive 1M this year, taking out 60K doesn't mean the other 940K ""weren't received"". They were, and are taxable. Create a pension fund in the corporation, feed it all profits, and pay   out $60k/yr of ""pension"". I doubt that the corporation could deduct a   million a year in pension funding. You cannot do that. You can only deposit to a pension plan up to 100% of your salary, and no more than $50K total (maybe a little more this year, its adjusted to inflation). Buy a million dollars in ""business equipment"" of some sort each year   to get a deduction, then sell it over time to fund a $60k/yr salary. I   doubt such a vehicle exists. If there's no real business purpose, it will be disallowed and you'll be penalized. Your only purpose is tax avoidance, meaning you're trying to shift income using your business to avoid paying taxes - that's illegal. Do crazy Section 79 life insurance schemes to tax-defer the income.   The law caps this so I can only deduct < $100k of the $1 million   annually, and there are other problems with this approach.\ Yes. Wouldn't go there.  Added: From what I understand, this is a term life insurance plan sponsored by the employer for the employee. This is not a deferral of income, but rather a deduction: instead of paying your term life insurance with your own after tax money, your employer pays with their pre-tax. It has a limit of $50K per employee, and is only available for employees. There are non-discrimination limitations that may affect your ability to use it, but I don't see how it is at all helpful for you. It gives you a deduction, but its money spent, not money in your pocket. End added. Do some tax avoidance like Facebook does with its Double Irish trick,   storing the income in some foreign subsidiary and drawing $60k/yr in   salary to be taxed at $60k/yr rates. This is probably cost-prohibitive   for a $1MM/yr company. You're not Facebook. What works with a billion, will not work with a million. Keep in mind that you're a one-man business, things that huge corporations like Google or Facebook can get away with are a no-no for a sole-proprietor (even if incorporated). Bottom line you'll probably have to pay the taxes. Get a good tax professional to help you identify as much deductions as possible, and if you can plan income ahead - plan it better." I agree with the other posters that you will need to seek the advice of a tax attorney specializing in corporate taxation. Here is an idea to investigate: Could you sell the company, and thereby turn the profits that are taxed as ordinary income into a long-term capital gain (taxed at 15%, plus state income tax, if any)? You can determine the value of a profitable business using discounted cash flow analysis, even if you expect that the revenue stream will dry up due to product obsolescence or expiry of licensing agreements.  To avoid the capital gains taxes (especially if you live in a high-tax state like California), you could also transfer the stock to a Charitable Remainder Trust. The CRT then sells the shares to the third-party acquirer, invests the proceeds and pays you annual distributions (similar to an annuity). The flip side of a sale is that now the acquiring party will be stuck with the taxes payable on your company's profits (while being forced to amortize the purchase price over multiple years -- 15, if I recall correctly), which will factor into the valuation. However, it is likely that the acquirer has better ways to mitigate the tax impact (e.g. the acquirer is a company currently operating at a loss, and therefore can cancel out the tax liabilities from your company's profits).  One final caveat: Don't let the tax tail wag the business dog. In other words, focus your energies on extracting the maximum value from your company, rather than trying to find convoluted tax saving strategies. You might find that making an extra dollar in profits is easier than saving fifty cents in taxes.
Depending on the size of the donation, you may be able to reduce taxes further by donating appreciated assets, such as stock or fund shares that have gone up a lot. That lets you dodge the capital gains tax on redeeming the shares, and if you're donating to a tax-exempt organization they don't have to pay that tax either.  And as @JoeTaxpayer has confirmed, you still get to deduct the current value of the donation, not just the basis value of those shares. So if you're donating anyway, this comes close to being Free Money in exchange for some slightly annoying paperwork. (Yet another benefit of long-term investing!) Of course folks in the top brackets sometimes set up their own tax-exempt foundations so they can decouple taking the tax break from deciding what to do with the donation. "Securities and ETFs are also subjected to Estate Tax.  Some ways: Draft a ""Transfer on Death"" instruction to the broker, that triggers a transfer to an account in the beneficiary's name, in most cases avoiding probate. If the broker does not support it, find another broker.  Give your brokerage and bank password/token to your beneficiary. Have him transfer out holdings within hours of death.  Create a Trust, that survives even after death of an individual.  P.S. ETF is treated as Stock (a company that owns other companies), regardless of the nature of the holdings.  P.S.2 Above suggestions are only applicable to nonresident alien of the US." "Assuming that the will that bequeathed the money to your son did not stipulate any restrictions or set up a trust to hold the money until your son turns 25, or something like that, I don't think you have much choice except to put the money in a UTMA account (which of course can be invested in whatever  the trustee (which could be you, or you and your wife jointly) decides.  Note: not a UGMA account since the money is not a gift. You also don't have any option except to turn the account over to your son when he turns eighteen. The point is, the investment can be in anything as long as the account is registered as a UTMA account.  But do remember also that your son is entitled to sue you for breach of fiduciary duty if you don't take good care of the money, so that blowing it all in risky investments is also not a good idea. If you are worried about taxes and your son's income being taxed at your rate, one way of deferring the issue is to buy US Savings Bonds. The interest can be deferred from taxation until the bonds are redeemed. Edit added in response to JoeTaxpayer's comments: But a better strategy is to declare the accrued interest each year as unearned income of the child on the kiddie tax form that is part of your tax return, and pay the tax, if any, that results To ease your mind or conscience, think of the tax that you pay on your child's behalf as a gift to your child! In any case, there will likely not be much tax due since the first $950 of unearned  income of a child is tax-free and the next $950 taxed at 10%. Then, when the bonds are cashed in, the interest that accrued (and was ""taxed"") in earlier years can be deducted  from the interest (cash in price minus purchase price) that you (or your son) will be told is the interest that the bonds earned. Of course, if kiddie tax is not a concern (and it shouldn't be, given the amount available for investment), an even better strategy is to set up the UTMA account(s) in long-term investments in low-cost index funds or ETFs (as JoeTaxpayer suggests) and pay the tax, if any, as it comes due." Not a bad strategy. However: If you REALLY want tax efficiency you can buy stocks that don't pay a dividend, usually growth stocks like FB, GOOGL, and others. This way you will never have to pay any dividend tax - all your tax will be paid when you retire at a theoretically lower tax rate (<--- really a grey tax area here).  *Also, check out Robin Hood. They offer commission free stock trading. You can move money in and out of the business at will, just keep track of every transaction. Ideally you'd use an accounting software like QuickBooks or similar. Create a Capital Contributions account and every time you put money into the business checking account record it as a Capital Contribution. Likewise, if you take money out of the business, it comes from your capital accounts. (You can create a separate Capital Distributions account in your accounting software, or just use a single account for contributions and distributions). Money coming in and out of those capital accounts is not taxable because you will pay taxes based on net earnings regardless of whether or not you have distributed any profits. So there's no need to make a loan to the company, which would have tax consequences. To reimburse yourself for purchases already made, submit an expense report to the company. If the company is unfunded right now, you can make a capital contribution to cover current expenses, submit the expense report, and wait until you have some profits before paying out the expense report or making any distributions. Welcome to entrepreneurship. "What you're talking about is called ""tax gain harvesting,"" and it is considered good tax management. From The Oblivious Investor, investors in the 10% or 15% bracket pay 0% tax on long-term capital gains. For an interesting take on never paying income taxes again, check out Go Curry Cracker. You can claim up to $70,000 or so in capital gains before paying any taxes if you are the 10% or 15% tax bracket." In cases like this you should be aware that tax treaties may exist and that countries are generally willing to enter into them. Their purpose is to help prevent double taxation. Tax treaties often times give you a better tax rate than even being a resident of the countries in question! (For instance, the Italy to US tax rate is lower than simply doing business in many United States)  This should guide your google search, here is something I found for Germany/Spain http://tmagazine.ey.com/wp-content/uploads/2011/03/2011G_CM2300_Spain-Germany-sign-new-tax-treaty.pdf It appears that the dividend tax rate under that treaty is 5% , to my understanding, the income tax rates are often multiples higher! I read that spain's income tax rate is 18%  So what I would do is see if there is the possibility of deferring taxes in the lower tax jurisidiction and then doing a large one time dividend when conveninet. But Germany isn't really known for its low taxes, being a Federal Republic, the taxes are levied by both the states and the federal government. Look to see if your business structure can avoid being taxed as the entity level: ie. your business' earnings are always distributed to the owners - which are not germany citizens or residents - as dividends. So this way you avoid Germany's 15% federal corporate tax, and you avoid Spain's 18% income tax, and instead get Spanish dividends at 5% tax. Anyway, contact a tax attorney to help interpret the use of the regulations, but this is the frame of mind you should be thinking in. Because it looks like spain is willing to do a tax credit if you pay taxes in germany, several options here to lower your tax footprint. I worked for a company who managed money for Braeburn. They are managed more like a foundation than a hedge fund. They invested in a fixed income separate account.   Yes, they definitely try to avoid taxes as the entity was domiciled in a Ireland and their offices were in Reno.   The goal of Braeburn is to maintain that huge amount of cash on the balance. avoiding taxes is an efficient way to do that. There is a fourth option - pay those taxes. Depending on the amounts, it might be the easiest way - if you make 34.49 in interest, and pay 6 $ in taxes on it, and be done, that might not be worth any other effort. If the expected taxable amount is significant, moving (most of it) to index funds or other simply switching existing investments to ‘reinvest’ instead of ‘pay out in cash’ would be the best approach. Again, some smaller amounts in savings or checkings accounts are probably not worth any effort. Transferring the money to the US doesn’t save you taxes, as any interest would still be taxable. You have a risk to lose on the conversion back and forth (and a potential to gain - the exchange rate could go either way!), so if you are sure you go back, it’s not a good idea to move the money. Income and Capital are taxed separately in the uk.  You probably can't get dividends paid  gross even in ISA's you pay the basic rate of tax on dividends only higher rate tax payers get tax benefit from dividends. What you could do is invest in splits (Spilt capital investment trusts ) in the share class where all the return comes as capital and use up some of your yearly CGT allowance that way. First, can I even roll any my profits into a 529 plan to avoid taxes. No. 529 plans are not pre-tax (except for State taxes in certain States, where 529 contributions are deductible. Ohio is such a State, with certain conditions). For Federal taxes - funding a 529 with yourself as a beneficiary doesn't change a thing on your taxes. Is there any special requirements for the state of Ohio. Yes, see the link above. Essentially you'll be carrying the deduction forward for years until you exhaust it, $2000 at a time. Is there a better solution that I am overlooking. No. If it was easy to avoid income taxes - everyone would be doing it. "Document how you came to have the stuff in the first place. First to defend against potential government inquiry; and second to establish that you held the asset more than one year, so you qualify for long-term capital gains rate.  I wouldn't sell it privately all at once, if you can avoid it.   If you can prove you held it more than a year,  you should pay the long-term capital gains tax rate, which is fairly low.  You'll keep most of it.  A huge windfall often goes very badly. People don't change their financial habits, burn through their winnings shockingly fast, overspend it, and wind up deep in debt.  At the end of the crazy train, their lives end up worse.   That wasn't your question, but you'll do better if you're on guard for that, with good planning and a desire to invest it in things which give you deferred income in the future. That's the cooler thing, when your investments mean you don't have to go to work! I don't mean donate ALL of it to charity. But feel free.  If you hold a security more than one year, and donate it to charity, you get a tax deduction for the appreciated value (even though the security didn't actually cost you that). (link) Do not convert the BTC to cash then donate the cash. Donate it as BTC.  Your tax deduction works against your highest tax bracket.  If you are paying in a 28% tax bracket (your next $100 of income has $28 tax), then for every $100 of charitable donation, you get $28 back on Federal. It does the same to state tax, and you also avoid the 10-15% capital gains tax because you didn't sell the securities.  Do your 1040 both ways and note the difference.***** Your charitable deduction of appreciated securities is capped at 30% of AGI.  Any excess will carryover and becomes a tax deduction for the next year, and it can carryover for several years. **  Use a donor-advised fund. If you have are donating more than $5000, you don't need to search for a charity that will take Bitcoin, and you also don't need to pick a charity now.  Instead, open a special type of giving account called a Donor-Advised Fund.  The DAF, itself, is a charity. It specializes in accepting complex donations and liquidating them into cash.  The cash credits to your giving account.  You take the tax deduction in the year you give to the DAF.  Then, when you want to give to a charity, you tell the DAF to donate on your behalf***.   You can tell them to give on your behalf anonymously, or merely conceal your address so you don't get the endless charity junk mail.   The DAF lets you hold the money in index funds, so your ""charity nest egg"" can grow with the market.  Mine has more than doubled thanks to the market.  This money is no longer yours at this point; you can't give it back to yourself, only to licensed charities. The Fidelity Donor Advised Fund makes a big thing of taking Bitcoin, and I really like them. **** I love my DAF, and it has been a charitable-giving workhorse.  It turns you into a philanthropist, and that changes you life in ways I cannot describe. Certainly makes me more level-headed about money.   Lottery winner syndrome is just not a risk for me (partly because I'm now on the board of charities, and oversee an endowment.)  Donating generally will reduce suspicion (criminals don't do that), but donating to a DAF even moreso.  Since the DAF would have to return ill-gotten gains, they're involved.  Their lawyers will back you up.  The prosecutor is up against a billion dollar corporation instead of just you.  With Fidelity particularly, Bitcoin is a crusade for them, and their lawyers know how to defend Bitcoin.  A Fidelity DAF is a good play for that reason alone IMO.  ** The gory details: Presumably you are donating to regular charities or a Donor Advised Fund, and these are ""50% limit organizations"". Since it's capital gains, you have a 30% limit. If your donation is more than 30% of AGI, or if you have carryover from last year, you use Worksheet 2 in Publication 526. You plug your donations into line 4, then the worksheet grinds through all the math and shows what part you deduct this year and what part you carryover to the next year.  *** I specifically asked managers at two DAFs whether they were OK with someone donating a complex asset to the DAF, and immediately giving the entire cash amount to a charity.  The DAF doesn't get any fees if you do that.  They said not only are they OK with it, most of their donors do exactly that and most DAF accounts are empty.  They make it on the 0.6% a year custodial fee on the other accounts, and charitable giving to them.    Mind you, you can only donate to 501C3 type charities, what IRS calls ""50% limit organizations"".  This actually protects you from donating to organizations who lie about their status.  **** I'm not with Fidelity, but I am a satisfied DAF customer.  The DAF funds its overhead by deducting 0.6% per year from your giving account. If you invest the funds in a mutual fund within the DAF, that investment pays the 0.08% to 1.5% expense ratio of the fund.   I can live with that.  ***** I just Excel'd the value of donating $100 of appreciated security instead of taking it as capital gains income.  28% Fed tax, 15% Fed cap gains, 8% state tax on both.  Take the $100 as income, pay $23 in cap gains tax.  Donate $100 in securities, the $23 tax goes away since you didn't sell it. Really.  The $100 charitable deduction offsets $100 in income, also saving you $36 in regular income tax.  Net tax savings $59.  However you lost the $100!  So you are net $41 poorer.  It costs you $41 to donate $100 to charity.  This gets better in higher brackets." No it's not, not until a disposition.  Keep track of the CAD value on the day you receive the inheritance and get an average cost.  Then every time you go to the US and spend some money, record the CAD value on the day you spend it.  The difference is your profit or loss.  There is no capital gain as long as you don't spend it. Now this may seem ridiculous, especially since none of this is reported to the CRA.  They realize this and say the first $200 profit or loss is not taxable. "If the investments are in a non-retirement, taxable account, there's not much you can do to avoid short-term capital gains if you sell now. Ways to limit short-term capital gains taxes: Donate -- you can donate some of the stock to charity (before selling it). Transfer -- you can give some of the stock to, say, a family member in a lower tax bracket. But there are tons of rules, gift limits, and won't work for little kids or full time students. They would still pay taxes at their own rate. Protect your gains by buying puts. Wait it out until the long-term capital gains rate kicks in. This allows you to lock in your gains now (but you won't benefit from potential future appreciation.) Buying puts also costs $, so do the ROI calculation. (You could also sell a call and buy a put at the same time and lock in your gains for certain, but the IRS often looks at that as locking in the short-term capital gain, so be careful and talk to a tax professional if you are considering that method.) Die. There's a ""step-up"" basis on capital gains for estates. source: http://www.forbes.com/2010/07/30/avoid-capital-gains-tax-anschutz-personal-finance-baldwin-tax-strategy.html" "Perhaps you can track your VAT amounts in a Liability account.  Using a tax liability account is a common thing in accounting. To do this, when you receive money, split the transaction such that your actual revenue (which you will keep after VAT remittance) goes into an Asset account, and the amount you will eventually have to pay back to the state goes into a Liability account.  Later, when you pay the VAT back to the state, your transaction will effectively ""pay back"" the liability, with one end of your double-entry decreasing the funds in your checking account, and the other end decreasing the funds in your tax liability account. Having said that, I've found that there are many shortcomings in the Cash Flow report, and I'm not sure that using a tax liability account (which I think is the Right Thing to do) will necessarily solve this problem for you..."