I have a psuedo-relative that will be coming into a lot of money soon, due to her selling large amounts of timber from her property.
What is the best way to avoid having to pay taxes on it? After all, she has watched it grow on her land for the last 30+ years.
She is thinking about giving some of the money away to children and grandchildren. Is this the best way to go? Will she still have to pay taxes? Will the recipients still have to pay taxes?
Thanks!
Give me some!
Seriously, what counrty or what state is this? I would get myself a tax lawyer.
It is impossible to avoid paying taxes on money you earn. The IRS are experts at screwing you every way possible.
That said, you can reduce your tax burden in a few ways.
There are probably more ways but that’s all I could think of.
and #1. doesn’t even get you off the hook. The tree seller will still have to pay taxes on what she earns, but the gift receiver will not have to pay additional gift taxes (if below $10,000).
#2 will work, but deductions only reduce taxible income. Give away $1000 and get a tax savings of ~$350.
You can lower your tax bill dollar for dollar buy putting it in an IRA.
I agree with the tax lawyer advise hopefully prior to negotiating the sale. There may be ways to structure the deal that would have a major impact on the tax consequences.
Ya need a tax lawyer.
It is possible (if the amounts are large enough) to put it into a charitable trust. eg The Ford Foundation, The Carnaige (sp)Charitable Trust etc…
You could also just chop down a few trees a year for 10 years or so. This might help depending upon other circumstances.
By the way, is she selling the just the trees or the land with the trees? I’d think there would be different tax implications for the two.
If she’s selling the trees only, then perhaps she can get the land reassessed at a lower value for property tax purposes. If she’s selling the land as well, then I think capital gains come into play. And she can dodge taxes on the land by reinvesting in other land.
But assuming it’s just the trees, there is only one possible option to dodge taxes, which would be some obscure credit/deduction put into the tax code for the lumber industry. I have no idea if it exists, which is why she should talk to a tax specialist.
Failing that (which means the money would count as simple income), she sholdn’t be looking at this sale as isolated from her other income and property. It’s just another above the line subtotal as far as the IRS is concerned. Her aim should be to reduce her total tax burden.
The best way not to pay much tax on income is to not receive much. In this particular situation, that means that you’ll want to make sure that the cost basis of the trees is as high as legally permissible.
This is a very complex area of tax law – I know people who have got into serious trouble over relatively minor mistakes. You want to talk to an expert (if you’re in an area where tree sales occur often, there will be someone with expertise on it) to get the cost basis up there.
manhattan is right. The best thing you can do is attempt to defer it. Here’s one possibility, but apply standard see-an-expert disclaimer:
The IRS has a rule that says you can take the proceeds from a qualified small company and roll them into another qualified small company and defer paying taxes on the income.
So, if you can structure the sale of trees to be from a qualified small company (qualified means few owners, relatively small revenues; this timber company probably qualifies), and immediately (new shares issued within 60 days of sale of old shares, and the IRS is extremely sticky about this; 61 days doesn’t work.) buy stock in your new company (you can be the sole shareholder), you will be covered. The new company must have a business purpose, but one of the things it can do is pay you a salary, so that you’ll recognize that salary each year with a far less tax bill, spread out over many years. Also, this new corp can distribute the money over the years as you see fit, giving to charities or paying people for whatever. But again, it must have an actual business purpose.