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Posted by Mark Bole on December 23, 2007, 8:07 pm
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Mark Freeland wrote:
> It seems that one can do some post year-end tax planning to avoid loss of
> some state income tax deductions due to AMT. By paying additional state
> estimated taxes between Jan 1 and Jan 15, one has the potential of shifting
> a non-deductible tax payment in 2007 to a deductible one in 2008. Example
> clarifying follows. Does anyone see a problem with this?
>
> Suppose for 2007 one has paid to state $5K, and one's state income tax is
> $5K (no refund, no payment due). Suppose also that for AMT purposes, $1K is
> non-deductible - that is, if one had only paid in $4K, then ordinary income
> tax = AMT tax (so no additional amount would have been owed due to AMT).
> But the final $1K reduces the ordinary income tax below AMT tax, and is thus
> useless.
>
> Suppose the person pays an early Jan estimate of $1,250 (toward 2007 taxes).
> The state will refund $1,250 (excess payment). The IRS will prorate that
> refund: 4/5 is attributable to 2007 (since 4/5 of the $6250 paid in was paid
> in 2007), and 1/5 ($250) is attributable to 2008.
If I understand you correctly, this is completely wrong. For a cash
basis taxpayer, there is no proration.
> Of the $1250 payment in 2008, the IRS will regard $250 as a wash (paid in in
> 2008, refunded in 2008). It will regard the other $1000 as a true tax
> refund. Even though the person itemized and tried to deduct that $1000, it
> had no effect on taxes; that means that the person did not benefit from the
> deduction, and thus the $1000 refund is not taxable in 2008 (the same
> reasoning as if one had taken a standard deduction).
It is possible that due to AMT, a state tax refund will not be fully
taxable as a recovery of a deductible amount in the *previous* year. If
the deduction and the recovery are in the *current* year, then the whole
thing is a wash. Again, there is no allocation of refunds across tax years.
>
> Net result - the taxpayer gets to deduct $1000 of taxes on the 2008 return,
> with no taxable income generated by the refund, and no out-of-pocket
> expenses (the taxpayer paid in $1250, but got it back from the state a
> couple of months later).
More likely, the taxpayer gets a $1,250 deduction in 2008 and a $1,250
taxable refund in 2008 -- net result zero.
>
> Of course this could all be an exercise in futility if the 2008 taxes are
> also in the AMT range, but at least it preserves the possibility of getting
> the deduction. Any problems with this strategy?
Yes, if subject to AMT in 2008, it is an exercise in futility.
-Mark Bole
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