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Posted by derkire on June 13, 2008, 2:52 pm
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Removeps,
"Estimated Tax Issue (Hypothetical)"
Thanks, I have read it. I found Ed's general hints
particularly useful. They also seemed to coincide
with common sense, which makes life easier when
trying to remember complex rules.
As an aside, I always suspect that many laws
in general and tax rules in particular would be much
easier to understand and remember if one only knew
the real *intent* behind the rule, and how the rule
implements that intent.
Unfortunately, laws and tax rules do not come with
manuals that explains what the authors were thinking
when they wrote the rule.
For example, AMT continues to befuddle me. I do not
understand which aspect of AMT rules prevented some
~500 richest families of ~1970 from not paying taxes.
I would love to see a very simple and concrete example
of an abuse that AMT (originally) shut down. Please don't
tell me AMT is all crock, I'm sure it is (or was) good for
something :-).
With tax rules, there is so much algorithmic and procedural
blah-blah about subtracting and adding weird categories
of numbers that the intent and big picture is completely lost,
at least to me and I think to most people.
Well, that was a bit of a rant, but if anyone has a simple
AMT-kills-this-abuse example I'd love to see it. Especially
something that involves the deduction of state taxes :-).
--
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<< nor can it used, for the purpose of avoiding penalties >>
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Posted by KEBSCHULLW on June 17, 2008, 12:20 am
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On Jun 12, 9:51 pm, derk...@gmail.com wrote:
> Earlier this year (2008), I paid a sizable amount (say 100k for
> simplicity) in 2007 CA state taxes. It was probably a big blunder
> not to expedite that payment in 2007, so that I could deduct it
> against 2007 federal income, but too late to do anything about
> that. I just didn't know the rules.
>
> I expect 2008 to be a considerable leaner year than 2007, in
> terms of income/gains.
>
> I'm trying to understand the implications of the 100k payment on
> my 2008 federal and state taxes. There are two areas that I have
> identified as likely sticky points.
>
> 1. Payment of estimated taxes in 2008
>
> Since I have a 100k deduction available, I would like not to
> pay estimated taxes in 2008 until I reach 100k worth of
> income/gains. Is this a reasonable approach for fed and state
> estimated taxes?
>
> I further plan on using irs.form2210/2210AI and the
> "annualized" method to avoid troubles with underpayments of
> estimated tax if income/gains arrive unevenly (and I think
> they will).
>
> 2. AMT in 2008
>
> With the big whopping 100k deduction being a tax preference
> item for AMT, I think I risk that AMT will be larger than
> regular tax in 2008, and hence take effect. If this occurs,
> will AMT then lead to penalties for underpayments, since per
> assumption I did not make estimated tax payments in some or
> all quarters?
>
> Thanks.
>
derk,
Not so fast.
What's the problem?
Let's start with section 164(a)(3)
Title 26, Subtitle A, Chapter 1, Subchapter B, Part VI
Sec. 164. Taxes
a) General rule
Except as otherwise provided in this section, the following taxes
shall be allowed as a deduction for the taxable year within which
paid
or accrued:
(3) State and local, and foreign, income, war profits, and excess
profits taxes.
The taxes that you paid to CA in 2008 were taxes that ACCRUED in 2007,
therefore are deductible on your Federal Income Tax Return for 2007
per section 164(a)(3). If you have already filed go back and amend.
The fact that you are not an accrual basis taxpayer is irrelevant.
If you think that my argument is frivolous, please consider the
argument that an IRS attorney made to support the exclusion from AMTI
of the refund of a state income tax overpayment that provided a tax
benefit in a prior year when only the regular tax was paid. When the
regular tax is paid state income taxes are deducted under section
64(a)(3) of the Internal Revenue Code as opposed to being disallowed
as a deduction under section 56(b)(1)(a)(ii) when the AMT is paid.
For section 56(b)(1)(D) to apply to the refund of a tax overpayment,
the tax must have been disallowed as a deduction under section 56(b)
(1)
(A)(ii). Here is the law and the summation of the IRS attorney's
argument.
Title 26, Subtitle A, Chapter 1, Subchapter A, Part VI,
Sec. 56. Adjustments in computing alternative minimum taxable income
(b) Adjustments applicable to individuals
In determining the amount of the alternative minimum taxable
income of
any taxpayer (other than a corporation), the following
treatment shall
apply (in lieu of the treatment applicable for purposes of
computing
the regular tax):
(1) Limitation on deductions
(A) In general
No deduction shall be allowed -
(ii) for any taxes described in paragraph (1),
(2), or (3) of
section 164(a). Clause (ii) shall not
apply to any amount allowable in
computing adjusted gross income.
(D) Treatment of certain recoveries
No recovery of any tax to which subparagraph (A)
(ii) applied shall be
included in gross income for purposes of
determining alternative
minimum taxable income.
The December 10, 2001, post that contains the published correspondence
with IRS's argument can be found on misc.taxes.
Now, here is the IRS attorney's argument.
73] Likewise, from a theoretical standpoint an individual taxpayer
who receives a refund of state income taxes should not be required to
include the refund in gross income for purposes of computing AMTI.
Section
56(b)(1)(D) provides this result. The fact that a taxpayer was not
liable for AMT for the taxable year when the state income taxes were
deducted, and therefore received a tax benefit from the deduction
through a
reduction in regular tax liability should not change the result. A
taxpayer is
only required to compute tax liability on regular taxable income and
tax
liability on AMTI and pay the higher amount. The integrity of the
respective tax bases should be maintained in determining which tax
applies and to
what extent.
If you were to examine the letter from the attorney in the IRS Office
of Chief Counsel you would find that the attorney argues that section
111(a) and 56(b)(1)(D) allow for 'DOUBLE OR NOTHING TAXATION" of the
income/refund related to state income tax overpayment while the
taxpayer argues that those sections provide for what amount to a "ZERO
SUM GAME".
When the correspondence was published the second sentence in the
following paragraph was false and IRS has never addressed the falsity
of the statement.
[59] As stated in prior correspondence we disagree with your
assertion that recoveries of taxes described in paragraphs (1), (2),
or (3) of
section 164(a) should only be excluded from gross income in computing
AMTI to
the extent deduction of the taxes did not reduce the taxpayer's income
tax liability. Under your interpretation section 56(b)(1)(D) would be
unnecessary; it would only apply to exclude items from gross income
when such items are already excluded from gross income under section
111.
What makes the second sentence in the paragraph above false?
The limited long-term capital gains rate based tax benefit! When the
AMT is paid a deduction taken on Schedule A for a state income tax
overpayment can increase the portion of capital gains taxed at 5
percent and reduce the portion taxed at 15 percent, thus a nominal 10
percent tax benefit. The benefit is exposed when IRS instruction in
IRS publication 525 are followed. Here is the instruction
Subject to alternative minimum tax.
If you were subject to the alternative minimum tax in the year of the
deduction, you will have to recompute your tax for the earlier year to
determine if the recovery must be included in your income. This will
require recomputation of your regular tax, as shown in the preceding
example and a recomputation of your alternative minimum tax. If
inclusion of the recovery does not change your total tax, you do not
include the recovery in your income. However, if your total tax
increases by any amount, you received a tax benefit from the deduction
and you must include the recovery in your income up to the amount of
the deduction that reduced your tax in the earlier year.
Section 56(b)(1)(D) is required to preclude DOUBLE taxation of the
refund that produced the capital gains rate based benefit if the AMT
is paid in the refund year. However, because IRS ignores a critical
part of section 111(a), a taxpayer who received the capital gains rate
based benefit in a year the AMT was paid will be taxed at the AMT
rate and then the regular tax rate on the income/refund.
There is little doubt that IRS would try to deny a deduction on your
2007 tax return for state income taxes accrued in 2007 but paid in
2008. But when problem with IRS's argument for excluding from AMTI
refunds of tax overpayments that provided a tax benefit in the prior
year when the regular tax was paid is exposed, they just might want to
reconsider their position.
Three reasons:
1. In recent years IRS's instruction for line 7 on Form 6251 has cost
the Treasury about ONE BILLION DOLLARS annually.
2. Section 164 states quite clearly,
a) General rule
Except as otherwise provided in this section, the following
taxes
shall be allowed as a deduction for the taxable year within
which paid
or ACCRUED:
3. Examination of IRS Form 2210 suggests that taxes can “accrue” even
before the income is
actually earned for determining the interest due to tax
underpayment.
Cheers,
WDK
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
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Posted by derkire on June 17, 2008, 1:28 pm
Please log in for more thread options On Jun 16, 9:20 pm, KEBSCHU...@aol.com wrote:
> On Jun 12, 9:51 pm, derk...@gmail.com wrote:
>
> derk,
>
>
> a) General rule
>
> Except as otherwise provided in this section, the following taxes
> shall be allowed as a deduction for the taxable year within which
> paid
> or accrued:
>
> (3) State and local, and foreign, income, war profits, and excess
> profits taxes.
>
> The taxes that you paid to CA in 2008 were taxes that ACCRUED in 2007,
> therefore are deductible on your Federal Income Tax Return for 2007
> per section 164(a)(3). If you have already filed go back and amend.
> The fact that you are not an accrual basis taxpayer is irrelevant.
>
> If you think that my argument is frivolous, please consider the
> argument that an IRS attorney made to support the exclusion from AMTI
> of the refund of a state income tax overpayment that provided a tax
> benefit in a prior year when only the regular tax was paid. When the
> regular tax is paid state income taxes are deducted under section
> 64(a)(3) of the Internal Revenue Code as opposed to being disallowed
> as a deduction under section 56(b)(1)(a)(ii) when the AMT is paid.
> For section 56(b)(1)(D) to apply to the refund of a tax overpayment,
> the tax must have been disallowed as a deduction under section 56(b)
WDK,
Is there any case law to support this, or would I be the Guinea Pig?
What does the rest of the crowd here think about this argument?
It must be a common occurrence to want to to do what WDK
suggests, for certain it is not only I that could need this.
OTOH, maybe it would make no difference because of AMT.
I should check first.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by ed on June 17, 2008, 3:37 pm
Please log in for more thread options On Jun 17, 12:28 pm, derk...@gmail.com wrote:
> On Jun 16, 9:20 pm, KEBSCHU...@aol.com wrote:
>
>
>
>
>
> > On Jun 12, 9:51 pm, derk...@gmail.com wrote:
>
> > derk,
>
> > a) General rule
>
> > Except as otherwise provided in this section, the following taxes
> > shall be allowed as a deduction for the taxable year within which
> > paid
> > or accrued:
>
> > (3) State and local, and foreign, income, war profits, and excess
> > profits taxes.
>
> > The taxes that you paid to CA in 2008 were taxes that ACCRUED in 2007,
> > therefore are deductible on your Federal Income Tax Return for 2007
> > per section 164(a)(3). If you have already filed go back and amend.
> > The fact that you are not an accrual basis taxpayer is irrelevant.
>
> > If you think that my argument is frivolous, please consider the
> > argument that an IRS attorney made to support the exclusion from AMTI
> > of the refund of a state income tax overpayment that provided a tax
> > benefit in a prior year when only the regular tax was paid. When the
> > regular tax is paid state income taxes are deducted under section
> > 64(a)(3) of the Internal Revenue Code as opposed to being disallowed
> > as a deduction under section 56(b)(1)(a)(ii) when the AMT is paid.
> > For section 56(b)(1)(D) to apply to the refund of a tax overpayment,
> > the tax must have been disallowed as a deduction under section 56(b)
>
> WDK,
>
> Is there any case law to support this, or would I be the Guinea Pig?
>
> What does the rest of the crowd here think about this argument?
> It must be a common occurrence to want to to do what WDK
> suggests, for certain it is not only I that could need this.
>
> OTOH, maybe it would make no difference because of AMT.
> I should check first.
>
> --
> << ------------------------------------------------------- >>
> << The foregoing was not intended or written to be used, >>
> << nor can it used, for the purpose of avoiding penalties >>
> << that may be imposed upon the taxpayer. >>
> << >>
> << The Charter and the Guidelines for submitting posts >>
> << to this newsgroup as well as our anti-spamming policy >>
> << are atwww.asktax.org. >>
> << Copyright (2007) - All rights reserved. >>
> << ------------------------------------------------------- >>- Hide quoted
text -
>
> - Show quoted text -
We have seen where you lost all use of the $270K in 2008 and will be
paying AMT. That means you won't have to add any refund on it to
taxable income next year.
I ipersonally don't agee with his statement: "The fact that you are
not an accrual basis taxpayer is irrelevant." It's EITHER Cash or
Accrual, not both.
ed
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by KEBSCHULLW on June 18, 2008, 10:40 am
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>
> We have seen where you lost all use of the $270K in 2008 and will be
> paying AMT. �That means you won't have to add any refund on it to
> taxable income next year.
>
> I ipersonally don't agee with his statement: �"The fact that you are
> not an accrual basis taxpayer is irrelevant." �It's EITHER Cash or
> Accrual, not both.
>
> ed
>
Ed:
Where does it state in section 164 of the Internal Revenue Code that
derk had to be an accrual taxpayer to deduct a state income tax
accrued
on income earned in 2007 but paid in 2008? As I read section 164, it
only
speaks of tax accrued in a year.
Where in section 56(b)(1)(D) of the Internal Revenue Code does it
state
that a tax deducted under paragraphs (1), (2), or (3) of section
164(a) in a year that the regular tax was paid is to be excluded from
Alternative Minimum Taxable Income? The instruction on Line 7 of
Form 6251 that does that has cost the Treasury billions of dollars
since
1988 as a result of neither the income used for a state income tax
overpayment nor the refund of the overpayment being taxed when
the overpayment was in a year that the regular tax was paid and the
refund was
in a year the AMT was paid.
Section 56(b)(1)(D) precludes refunds that provided only a limited
long-term capital gains rate based tax benefit in the prior year when
the AMT was paid from being included in AMTI.
Without section 56(b)(1)(D), both the income and the refund related to
the limited long-term capital gains rate based tax benefit would be
included in AMTI and therefore double taxed.
Sometimes, IRS and states taxing agencies go off track with their
instructions to taxpayers. Taxpayers just have to be alert.
Example: North and South Carolina had a requirement for years prior
to 2006 that non-residents with income in their state had to file MFS
if his/her spouse did not have income in their state. The problem
with that was that North Carolina did not have a statute with that
requirement and if they did it violated the privileges and immunities
clause in the US Constitution. Here are links to threads that
discussed that issue in 2000 and 2006.
http://groups.google.com/group/misc.taxes.moderated/browse_frm/thread/c29bb0b9bbd9e5b3/878887b95d308f6d?lnk=gst&q=north+carolina%2C+mfs+non-residents#878887b95d308f6d
http://groups.google.com/group/misc.taxes.moderated/browse_frm/thread/6782735e1c0dba72/e90c63cb27affbfd?lnk=gst&q=north+carolina%2C+mfs+non-residents#e90c63cb27affbfd
Cheers,
WDK
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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