Ideas For How to Minimize Tax Consequences of Surprise $100k "Income"

Definitely call a CPA and/or attorney.  I think I see the Sparkydog Family Trust being formed.

I did the same thing you did between age 56 when I retired and 65 to get healthcare for $1.00/month. There were a couple years where I had extraordinary income and I reported it as such to Healthcare.gov. They never upped my monthly or clawed back anything because it was not an ordinary income item. Each time it was a one-off windfall.

SV reX said:

That's true. It does affect SS.  But probably not significantly. 
 

IIRC, they take your 35 highest earning years and average them.  So, 1 high year has an impact, but it's averaged over a lot of years. 

Income used for SS calculations is capped at (I believe $160k) annually. This adjusts up every year. So everything you make over the figure applicable to that year is not subject to SS tax nor does it help with your SS payment amount when you claim.

In reply to 67LS1 :

Hmm... I'm not familiar with that. But it would be relevant to the OP... he is talking about an income of $118K

AngryCorvair (Forum Supporter) said:

Find a way to make it capital gains rather than ordinary income. Better yet, find a way to get the small business stock exemption from capital gains Section 1202

its definitely worth a couple hundred bucks to talk to a tax attorney on this.

AngryCorvair:  You've always been better at parsing rules than me, so help me understand how this might work...

As I understand the Section 1202, it's for capital gains on stock sales, and you have to hold the stocks for 5 years. The OP doesn't own stock in the company, and if the gift was given to him as stock, he'd have to hold it 5 years, and then only his gains during those 5 years would be exempt (not the original gift). 
 

What am I missing?  How are you picturing this playing out?

As I understand from the OP, he was given $100k, cash. not $100k of stock. If so, there isn't any "stock" to hold onto to turn it into long term capital gains, which I believe is 1 year.

67LS1 said:

As I understand from the OP, he was given $100k, cash. not $100k of stock. If so, there isn't any "stock" to hold onto to turn it into long term capital gains, which I believe is 1 year.

Correct. I was given money not stock.

Replying to Sparkydog, SVreX, and 67LS1:

67LS1 said:

As I understand from the OP, he was given $100k, cash. not $100k of stock. If so, there isn't any "stock" to hold onto to turn it into long term capital gains, which I believe is 1 year.

Correct. I was given money not stock.

Yes, he was given $100k for (loosely paraphrasing): helping to start and grow the company.

The reason i said "depending on timing and documentation", perhaps it's possible to document the $100k as a certain percentage of the company, and the $100k is really proceeds from sale of that percentage of the company.  All you need is a government-hating tax guy to sign the forms and manage the audit for you.

67LS1 said:

As I understand from the OP, he was given $100k, cash. not $100k of stock. If so, there isn't any "stock" to hold onto to turn it into long term capital gains, which I believe is 1 year.

Have to hold the stocks for 5 years to qualify for the Secrion 1202

In reply to Sparkydog :

You already have the money?  How was the check made out?

It might not be possible to call it income to a business

If it's 1099 income there are zero degrees of freedom already from the income angle. There could be ones on the expense side, but CPA time.

Nobody suggested to do the IRA or pretax choices and then just pay the taxes.  You're still $50-$60,000 ahead?

Death and taxes, I guess.

Datsun310Guy said:

Nobody suggested to do the IRA or pretax choices and then just pay the taxes.  You're still $50-$60,000 ahead?

Death and taxes, I guess.

He's trying to keep his income deliberately low not because of the taxes, but because the increase in income could cause a significant increase in his medical costs. 

I'm not sure that you have anything to worry about. Acknowledging that they're a particularly inept part of the government, Healthcare.gov's website states that "Marketplace savings are based on your expected household income for the year you want coverage, not last year’s income." You're not going to expect that windfall next year. 

Aside from the obvious of "consult a professional" and "HSA/401k/IRA/529k maxes", the LLC idea has some merit. I don't know the behind the scenes accounting of it all - the part I get hazy on is how you get the money from you to your LLC without it getting taxed - but you could potentially pay yourself via $73,500 to the 401k via the LLC. Now your taxable income is down to $26.5k. Now I'm intrigued if this is possible. 

#1, I would definitely talk to a CPA (or two!)

The starting a business idea to put money into as a "loss" for the year sounds like it's got good potential, but I am not a CPA so I can't say 100%. There's potential for a new (business) vehicle that could work. Again, check with a CPA. 

#2, maybe #1, tax-shelters. 

As mentioned already IRAs, 401ks, etc. If you start a business you have even more options. I am not a CPA, but I am a financial advisor and have some great options when it comes to tax-shelters, I'd be happy to chat. 

I went through this kind of thing 15 years ago. The company offered severance to anyone who took a voluntary layoff. In my case 24 months of severance. The best we could do at that time was split the payment over two calendar years to keep me in a slightly lower bracket. Splitting meant that I hit the maximum for Social Security in both years, but that had a benefit for my particular case because it meant I got a tenth year of paying in. Otherwise, we maxed out the 401K and IRAs and then just suck it up and pay the taxes.