Taxes

  Well, we are going to be paying a lot of taxes this year. I think that this year I'm not going to be doing my own taxes. The proceeds from the sale of the stock will be considered a long term capital gain for federal taxes, assuming you sold stock purchased at inception. But remember that California has a three tier capital gain structure and that you don't get the lowest rate until you hold the stock for five years, so none of us will be in the lowest California bracket. If you exercised any options this year (and of course everybody did), you also have to calculate Alternative Minimum Tax (AMT), even if you don't end up owing any. And remember that California also has its own   Alternative Minimum Tax, which will crank the effective California capital gains rate up to about 9.5% (don't complain: we all have to Do Our Part to contribute to the entrepreneurial renaissance in New Hampshire and Texas). So in any case, the calculation is going to be complicated.

Here are some random thoughts regarding the tax situation:

First of all, we can't wait until next April 15 to worry about the taxes. We'll have to make the next estimated tax payment on September 17. So a goodly part of the money you kiss hello on July 8, you will be kissing goodbye in September. You'll absolutely have to be able to make a quick shot at your 1985 tax liability and make that payment, because if you miss it, you can kiss something else goodbye. Estimated taxes are tricky, and there are several gimmicks which can help you keep the money in your hands for longer. For example, if your withholding plus estimated taxes for each quarter exceeds last year's tax liability, you don't have to make additional payments; you can just pony up the balance next April 15 and file the ``hey, it's cool'' form. But to do this, you'd have had to have made the qualifying payments last April and June. Did you? I sure didn't. Also, at the end of the year, the buggers will probably hit you for a deficiency because you didn't make estimated tax payments in April and June. You'll have to prove that your large slug of income didn't come until third quarter. Be sure you can.

Also, when calculating your taxes for estimated tax purposes, remember that you'll probably benefit substantially from income averaging this year. Don't overpay estimated taxes because you forgot this when making the estimate.

This probably doesn't apply to anybody, but I'll mention it just in case. If you have any long term capital losses (that Atari stock you bought when video games were going to the moon, the $800 gold coins, etc.) that you haven't realised, take the losses this year. You can offset long term capital losses dollar for dollar against gains, but you can only deduct $3000 of loss per year in excess of gain, so this year you can flush out all those unrealised losses. If you still want to hold the assets, buy 'em back more than 30 days later (the delay is to avoid a ``wash sale'', discounted for tax purposes).

Also, I don't think that anybody will have a significant excess AMT liability, but maybe your kid went to a painless dentist and you have some Intangible Drilling Expenses and are in AMT land. As long as your AMT exceeds your ordinary income, additional ordinary income is taxed at only 20%. So if you can discretionarily generate ordinary income (such as selling short term stocks at a gain, etc.), do it as long as your ordinary tax doesn't reach the AMT number. Conversely, if you're in a position of excess AMT, you want to put off taking any short term capital losses or deductible expenses (charitable contributions, etc.) because as long as you're in a 20% marginal bracket, Uncle is paying only 20%. If you can delay them to next year, you may be in a higher bracket.