Since a married couple with taxable income below $81k pays 12% on short term capital gains and a couple with over $329k in taxable income pays 32%, would it be legal tax avoidance or illegal tax evasion for that rich couple to sell something at their basis to that poor couple, have the poor couple sell it at market value, and then the poor couple gift the profit back to the rich couple (keeping the 12% they had to pay plus a couple more percent for their troubles)?
To put some numbers to it:
Rich couple has property worth $100,000 market value. Their basis in the property is $60,000. Poor couple has $40,000 in taxable income. Rich couple sells poor couple the property for $60k. Rich couple has no tax implications because they made no money. Poor couple sells the property for its market value and has $40k in ST capital gains. They are taxed at 12% on that gain. They pay the $4,800 in taxes, keep $1,000 for themselves, and then give $34,200 to the rich couple. The rich couple ends up with $94,200 for their $100,000 property. Had they sold it themselves, after taxes, they would have ended up with $87,200 ($60k + $40k gain minus 32% of $40k).
If this is legal, are there services out there that set this up? I assume real property would be too volatile to do it with considering how long it takes for transactions to go through and the unknown exact market value. But can it be done with stocks where the transaction takes place fast enough that the market value is known?
The scheme isnt legal. Gifts cannot be conditional. So while this string of circumstances could theorectically play out that way, it can’t be planned out that way. That faux “gift” at the end would be considered additional consideration for the inital sale. You’d have to make the series of transaction much more complex and involved - and the more involved you need to make it, the better the indication you probably shouldnt be doing it in the first place.
Now could you get away with it? Like most things tax related, there’s a good chance you would, especially as a one-off scenario (as long as you dont have other skeletons hiding in your closet).
As a side note, that poor couple would likely be getting screwed in the deal, as that extra income could easily bump them off various poor people programs, health insurance subsidies, etc.
Bargain sales
If you sell the asset to a family member for less than its fair market value, that constitutes a bargain sale. From a tax perspective, if you sell for less than the property’s fair market value, the difference between the value and your selling price is treated as a gift.
Thanks for the replies fellas. I think this is the key and I agree:
The reason this came up is because I failed to foresee this as a way to minimize taxes on a small real estate investment I went in on with my dad. We split everything 50/50. We doubled our money in 3 years, but it wasn’t that much money. My 50% of the gain didn’t bump me above $80k taxable (my wife is a homemaker at the moment), and had I taken the full gain, it still wouldn’t have bumped me above $80k taxable. So had we planned ahead, we could have put the property 100% in my name and I split everything with him at the end with no long term capital gains tax. Since we didn’t and his taxable income is over $80k, he’ll be stuck with some LT Cap Gain taxes on his half and I don’t use my low income to its fullest potential.
Now I’m brainstorming of what I can do over the next 2 years to benefit from this low taxable income. I think my wife will go back to work in 2025. So assuming she does, my window is closing.
I used the word “poor” in the description just to distinguish the two couples. In reality, a family that is poor (under $80k taxable) by IRS standards, doesn’t necessarily mean they are poor enough to qualify for those sort of poor people programs. Since they use taxable income for that threshold and the standard deduction is $25k, a family with an AGI above $100k could still get away with not paying any tax on Long Term Capital Gains. I’m somewhere in between that and “poor”, though I did qualify for the government’s free broadband program because I got laid off during the pandemic!
Fun reading this, but given the facts you describe, it would be a crime.
Also, not sure how rich the rich person is in your scenario, but they may lose some of their estate tax exclusion depending on the numbers, even if you could successfully prove these transfers back and forth were unrelated (which, you wouldn’t be able to).
He could gift you his half prior to any sale. Of course then it is all yours, and trying to split the proceeds creates the same issues regarding reciprocating gifts.
We already sold it. The opportunity was at the time of purchase when I could have bought it in my name with half his funds (which is way less messy than two of us each buying half, then one of us selling their half or gifting it). The funds transfer before the purchase could later be explained as, he loaned me money and then I paid him back and gave a gift as a thank you. Especially since I didn’t need his funds to fully finance the purchase, so I could have asked for them after closing. Oh well. It’s not like we knew for sure what my income would be in the sale year when we bought it. Hindsight’s 20/20. It wasn’t as large a gain as in my example. You just hate finding out that your family gave money to uncle Sam that they could have kept.
I got one that kind-of falls into something similar to “evasion or avoidance”… and I didn’t want to start a new thread.
Received an IRS notice CP12 which claims I made a mistake on my 2021 return. I have a Schedule H for one employee with wages > $2500. My understanding per this and this is that if 2021 wages exceeded $2300 (the links show $2400, which is for 2022), then I was supposed to withhold and pay SS and Medicare taxes. The notice says “the amount of cash wages reported on Schedule H was not enough to be considered taxable for employment tax purposes”, so they will refund the employment taxes and I should return half to the employee.
I’m 100% sure they f’ed up, because the wages are way above the threshold, and because I used my spreadsheet and H&R Block to file (print and mail). I downloaded the transcript and the numbers for Schedule H look correct. I did find one number on form 2441 was fat-fingered / mis-scanned, but it shouldn’t make any difference for Schedule H calculations. The question is – do I proceed as the notice suggests (file a corrected W-2C for the employee and refund the money withheld from their paychecks), or do I attempt to dispute? One concern is that once I refund half to the employee who no longer works for me, I won’t be able to get it back. Since I did everything right and the IRS f’ed up – would they be able to reverse this in case of some future audit and send me a bill?
ETA: Further, if I issue a W-2C, then the employee might have to file their own tax return and pay the employment taxes anyway. What a PITA.
I’d do what they say and leave it at that. For all you know, there was a special temporary covid relief measure that prompted the correction. Keep the letter, and if anyone ever asks you did exactly as they instructed.
I was aware of most measures that applied to me and didn’t see anything like that. Plus I updated the tax software before filing, because, IIRC, there was indeed some last minute change I was waiting for.
Do what, hire them as household employees? You can, but there’s usually no write-off, and there may be exceptions for immediate family like spouse, parents, or children. We hired a babysitter. My understanding is that most people pay them cash “under the table,” because it was not easy to figure out how to do payroll taxes myself. One reason for doing it by the book is I have a Dependent Care FSA from work, which is pre-tax. The tax savings are hardly worth the effort though, due to employment taxes (OASDI, FUTA and California UI, SDI, and ETT) that I had to pay on top of wages. CA requires quarterly reports and payments, and reporting and issuing a W-2 for the federal items is done through SSA by the January 31 deadline.
I actually got a human recently when calling the number on the CP12 (for a client of mine) when I called first thing in the morning. Was on hold less than 20 minutes. Might as well call in and say the same thing you said here, “I paid this employee above the threshold, but you are saying I didn’t. Can you explain it to me?” If the person says to just follow the letter, then that’s pretty much what you have to do.
I suspect this phone call will “cost” me a few hundred bucks, which is why I’m asking whether I should call or just treat it as a bank error in my favor
Did you really need to ask that question? The answer is absolutely yes.
Keeping the CP12 notice may, or may not, help you. Ultimately, if you ended up going to Tax Court, you’d probably win, but you don’t want to do that.
With ?? thousand new agents trying to justify their jobs, they will be keen to find fines, interest, and taxes. Consequently, I would make certain they’re not screwing up before following their advice.
I’m confused - are you wanting to correct the error and pay the money, or do you want to just let it go and keep what they tell you your supposed to get back?
They’re telling you how it is. You’ve confirmed they have the correct numbers (that, say, $12,000 didn’t scan as $1,200). It’s ok to assume you missed something; it’s your option to appeal their corrections, not your obligation.
What are they going to fine him for? It’ll be brand new territory if the IRS fines a taxpayer based on adjustments the IRS made to a return rather than the return the taxpayer filed.
