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Ask the Expert: Minimizing Tax Burden in an Unusually High Income Year

October 25, 2011

Mary Hoyt, CPA



Q:  I just sold my company.  What can I do to minimize the tax bill that results from the event?

A:  Everything starts with planning.  During the process of negotiating the sale of a business interest, professional advisors are engaged to ensure that the transaction is structured properly.  The terms of the sale document govern the outcome of the deal, and the tax provisions contained in the contract determine the amount of the ultimate income that one must report.

However, tax planning does not stop once the sale is complete.  In a year in which income is unusually high, there are many opportunities available to decrease the resulting tax bill.  Whether the income is generated from the sale of a business interest or something else (exercising stock options, sale of real estate or other investment property, golden parachutes, etc.), the individual tax considerations are typically the same.

One of the most common deductions a taxpayer can take advantage of in a “windfall year” is the charitable deduction.  Monies given to charities are tax deductible for both regular tax purposes as well as the alternative minimum tax. 

Each taxpayer needs to calculate his/her own savings based on their individual circumstances, but potentially a taxpayer that donates $100,000 can save up to $35,000 in federal taxes (based on the highest federal tax bracket of 35%).  Charitable deductions are limited to percentages of adjusted gross income depending on the type of gift given.  Any unused charitable deduction can be carried forward over five years.

There are many ways to give, including but not limited to:  an outright gift (cash, appreciate securities, etc.), contributing to a donor-advised fund, establishing a private foundation or funding a charitable trust. 

In order to maximize tax savings, it is important that the charitable giving be done in the same year the income is recognized.  Actually, doing this is sometimes more difficult that it sounds.  The income-producing event is often a time-consuming and emotionally charged matter.  Even when it is not, the timing of the event might be close to the end of the year.  Therefore, it is common that the choice of where these funds will be donated is one that the taxpayer wants to take more time to consider.

The donor-advised fund provides a wonderful opportunity to take a tax deduction in the current year while, at the same time, deferring the decision regarding which charity will receive the funds.  A contribution to any commercial gift fund is treated as a contribution to a public charity in the year the contribution is made, since it is an irrevocable gift which will ultimately be distributed to a qualified non-profit organization.

By using a donor-advised fund, the taxpayer can successfully maximize the tax savings of a large contribution.   Distributions from a donor-advised fund can be done at the donor’s discretion and spread over time.  These distributions are not tax deductible since the tax benefit was realized upon the funding.  Since distributions can be done over an extended period of time, this truly is a gift that keeps giving.

As a partner in BlumShapiro’s tax group, Mary focuses in the estates and trusts area, advising the firm’s clients as well as working with lawyers, bankers and fellow professionals.  Her expertise extends to complex individual tax matters.


Advisors | Auditors | Consultants | CPAs - Blum Shapiro is one of the premier public accounting firms in the northeast and a Top 100 CPA Firm in the U.S. Our professionals serve businesses, individuals and organizations in Boston (MA), Hartford (CT), Cranston (RI), Shelton (CT) ,Quincy (MA) and Newton (MA) with audit, tax and business consulting services. Our firm has developed practice areas in automotive, construction, education, government, healthcare, hospitality, manufacturing, nonprofit organizations and professional service firms. New Haven CT, Fairfield CT, Norwalk CT, Waterbury CT.