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I am single, retired early and thus can control my taxable income to a very high degree. I endeavor to get my toes right up to the max of the 15% bracket. I take the standard deduction and with one personal exemption, my target max is $40,600 for 2007. About half of this is taken by interest, dividends, and cap gain distributions in my various taxable accounts. The remaining headroom for this year has already been used by selling individual stocks in my taxable account to generate Long Term Cap Gains that are taxed at an oh so sweet 5% LTCG rate. So this is where I sat until this morning.

From January to April, I did some project management work for a friend who has a very sucessful small business. For a lot of reasons I insisted that he not pay me. I resisted his several attempts to give me money but ultimately succumbed when he offered to buy me a Harley. It cost $15,000.

Today he sent me an e-mail saying he wants to 1099 me for the Harley as well as pay for any tax consequences. Hence my question to the board is what are all the angles that need to be considered. Here is what I have thought of.

1. Tax on the $15,0000 will be a few hundred in the 15% bracket, with the bulk falling into the 25% marginal rate.

2. I will owe both employee and employer SS and medicare contributions on the $15,000. Can someone point me what form I must file. I never have been a 1099 person before.

3. My Long Term Cap Gains and qualified dividends will get pushed from the 5% rate to 15%.

4. I may owe penalities for underpayment of quarterly tax payments thus far into 2007. How can I determine if this is true and the amount of penalty?

5. I will become eligible to make a Roth Contribution this year whereas before I was not.

6. My friends business will cut me check to cover the sum of items 1 thru 4 and I will owe 25% on this amount too.

Have I overlooked anything? Any confirmation or advice or ideas on how to structure all of this would be most appreciated. This is Texas so there are no state taxes to deal with.

Thanks,... bhm
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