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Big deduction for state tax: implications on estimated tax payments, AMT, penalties derkire 06-12-2008
Posted by removeps-groups@yahoo.com on June 19, 2008, 10:08 pm
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> > Individuals can elect to be accrual taxpayers by filing form 3115
> > with the IRS. I doublt if you will find it advantageous even if
> > you could figure out form 3115,and the IRS allows you to change.
> > But you CAN'T combine accrual and cash for an item as WDK
> > imiplies.
>
> I agree with that. The clause from section 164 is "for the taxable
> year within which paid or accrued:..."
>
> It means, "paid or accrued, whichever is applicable to the taxpayer."

What about the foreign tax credit on form 1116?

http://www.irs.gov/pub/irs-pdf/f1116.pdf

It looks like if you're a cash basis taxpayer then you put the tax
paid. That means if you pay your foreign tax for tax year 2008 in
country XYZ on 2009, then you can only take the foreign tax credit for
it in 2009. Do you agree?

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Posted by ed on June 20, 2008, 12:03 am
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 On Jun 19, 9:08 pm, "removeps-gro...@yahoo.com" <removeps-
gro...@yahoo.com> wrote:
>
> > > Individuals can elect to be accrual taxpayers by filing form 3115
> > > with the IRS.  I doublt if you will find it advantageous even if
> > > you could figure out form 3115,and the IRS allows you to change.
> > > But you CAN'T combine accrual and cash for an item as WDK
> > > imiplies.
>
> > I agree with that.  The clause from section 164 is "for the taxable
> > year within which paid or accrued:..."
>
> > It means, "paid or accrued, whichever is applicable to the taxpayer."
>
> What about the foreign tax credit on form 1116?
>
> http://www.irs.gov/pub/irs-pdf/f1116.pdf
>
> It looks like if you're a cash basis taxpayer then you put the tax
> paid.  That means if you pay your foreign tax for tax year 2008 in
> country XYZ on 2009, then you can only take the foreign tax credit for
> it in 2009.  Do you agree?

How can I agree or disagree? I can't even understand what you're
saying let alone why you're now talikng about Foreign Tax. Do you have
a beef with the IRS over that too? Cash basis= pay foreign or state
tax in 2008 deduct it in 2008. Plus you have the lattitude to shift
the last estimate to either year. what's not to like?

ed

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<< 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 >>
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Posted by KEBSCHULLW on June 19, 2008, 7:00 pm
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> On Jun 19, 11:21�am, derk...@gmail.com wrote:
>
> > How does one change a persons accounting method choice
> > from paid(A.K.A. cash?) basis to accrued basis?
>
> > And there must of course be some drawbacks to doing it,
> > or else we would all be doing it already What are they?
>
> Individuals can elect to be accrual taxpayers by filing form 3115 with
> the IRS. �I doublt if you will find it advantageous even if you could
> figure out form 3115,and the IRS allows you to change. � But you CAN'T
> combine accrual and cash for an item as WDK imiplies. �You might have
> an accrual Schedule C or F within a cash1040. and I guess you could
> choose a *hybred* method of acounting where State Taxes are computed
> on an accrual method on an otherwise cash method 1040, but the
> complexities this causes would probably cause the IRS to not allow the
> accounting method change. �.All 1040 instructions (and specifically
> for line 5 of Schedule A) refer to payents, not �accruals, probably
> because no individual in his right mind would choose accrual
> accounting personally.and if you did you would know how to intrepret
> them for accrual vs cash. � �So, in �this regard, as I said before,
> WDK's sites allow for *either* accrual or cash accounting.
>
> You said " � � � � �I just did the experiment and it reduced federal
> taxes
> by about 14,294. Not bad"
>
> �I don't think that's right because a $270K State tax payment might
> reduce 2006 *Regular Tax*, but then the AMT will apply in 2006 without
> the benefit of that Deduction.
>
> ed
>
ed:

For a cash basis taxpayer taxes accrue throughout the as income is
received. Look at Form 2210. It is simply ludicruos for a person to
be thrown into the AMT due to a large capital gain in the fourth
quarter and the fact that the fourth quarter payment for a cash basis
taxpayer is paid after December 31. For it to be as you have stated
"either or", Congress would have to add language to that effect to
section 164(a).

I believe that I have show conclusively how screwed-up IRS's
interpretations of section 111(a) and 56(b)(1)(D) are. IRS's
interpretations of those sections result in "DOUBLE OR NOTHING
TAXATION" of the income/refunds related to state income tax
overpayments even though the language in those sections does not
permit such nonsense. When you can reconcile IRS interpretation of
sections 111(a) and 56(b)(1)(D) with the language in those sections, I
will concede on the "paid or accrued" issue but until then I am going
to base my opinion on the words that are in section 164(a). No more,
no less.

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. >>
<< ------------------------------------------------------- >>

Posted by ed on June 19, 2008, 7:47 pm
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On Jun 19, 6:00 pm, KEBSCHU...@aol.com wrote:
>
>
>
> > On Jun 19, 11:21�am, derk...@gmail.com wrote:
>
> > > How does one change a persons accounting method choice
> > > from paid(A.K.A. cash?) basis to accrued basis?
>
> > > And there must of course be some drawbacks to doing it,
> > > or else we would all be doing it already What are they?
>
> > Individuals can elect to be accrual taxpayers by filing form 3115 with
> > the IRS. �I doublt if you will find it advantageous even if you could
> > figure out form 3115,and the IRS allows you to change. � But you CAN'T
> > combine accrual and cash for an item as WDK imiplies. �You might have
> > an accrual Schedule C or F within a cash1040. and I guess you could
> > choose a *hybred* method of acounting where State Taxes are computed
> > on an accrual method on an otherwise cash method 1040, but the
> > complexities this causes would probably cause the IRS to not allow the
> > accounting method change. �.All 1040 instructions (and specifically
> > for line 5 of Schedule A) refer to payents, not �accruals, probably
> > because no individual in his right mind would choose accrual
> > accounting personally.and if you did you would know how to intrepret
> > them for accrual vs cash. � �So, in �this regard, as I said before,
> > WDK's sites allow for *either* accrual or cash accounting.
>
> > You said " � � � � �I just did the experiment and it reduced
federal
> > taxes
> > by about 14,294. Not bad"
>
> > �I don't think that's right because a $270K State tax payment might
> > reduce 2006 *Regular Tax*, but then the AMT will apply in 2006 without
> > the benefit of that Deduction.
>
> > ed
>
> ed:
>
> For a cash basis taxpayer taxes accrue throughout the as income is
> received.  Look at Form 2210.  It is simply ludicruos for a person to
> be thrown into the AMT due to a large capital gain in the fourth
> quarter and the fact that the fourth quarter payment for a cash basis
> taxpayer is paid after December 31.

It is not "ludicruos" that the taxpayer escaped AMT through out the
year by using the AI Method. His 4th iinstallment makes up the
difference between the lower of last year's tax or 90% of current
yeaars tax and what he has already paid in the first 3 quarters.
That's a pretty good deal for the taxpayer. It's not just the 4 th
quarter subject to AMT, it is the whole year on his 1040. If he
chooses to pay State income tax in December he loses the benefit due
to AMT.. He can postone it to January in the hope that he won't be
subject to AMT next year. I think it's prohibitive for him to switch
back and forth between accrual and cash without gioing through the
3115 routine.

 For it to be as you have stated
> "either or", Congress would have to add language to that effect to
> section 164(a).


The language is already there. All that is needed is that someone
use ommon sense when intrepreting it. You can't pick and choose ,
particularly between quarters, whether to accru or cash.

> I believe that I have show conclusively how screwed-up IRS's
> interpretations of section 111(a) and 56(b)(1)(D) are.  IRS's
> interpretations of those sections result in "DOUBLE OR NOTHING
> TAXATION" of the income/refunds related to state income tax
> overpayments even though the language in those sections does not
> permit such nonsense.  When you can reconcile IRS interpretation of
> sections 111(a) and 56(b)(1)(D) with the language in those sections, I
> will concede on the "paid or accrued" issue but until then I am going
> to base my opinion on the words that are in section 164(a).  No more,
> no less.
>
Sorry, I can't follow most of your rant but I agree with you the IRS
is scrfewed up for (probably)this and other reasons. Which part of OR
don't you understand? Are you objecting because the IRS intreprets OR
to mean accrual or cash in a way to somehow cheat the taxpayer?

ed


> 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 atwww.asktax.org.                 >>
> <<         Copyright (2007) - All rights reserved.         >>
> << ------------------------------------------------------- >>- Hide quoted
text -
>
> - Show quoted text -

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<< ------------------------------------------------------- >>
<< 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. >>
<< ------------------------------------------------------- >>

Posted by KEBSCHULLW on June 19, 2008, 3:59 pm
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> On Jun 18, 9:40�am, KEBSCHU...@aol.com wrote:
>
> > 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.
>
> > Cheers,
>
> > WDK

> WDK: � Your issue about not paying the same tax rate for State Tax
> refunded (1040 line 10) as you deducted on Schedue A is valid and as I
> recall the IRS corrected this.

> However, you are reading "accrued or paid" as meaning *both* for the same
taxpayer, � > whereas the intent is obviously to mean "whichever accounting
method that taxpayer used".

ed

"correct this" Correct what?????

Section 111(a) does not address the potential changes in regular tax
rates from year to year causing the tax on a refund being more or less
than the benefit received by the deduction of the overpayment in the
prior year. Some times the government benefits and sometimes the
taxpayer benefits when the regular tax rate in the overpayment year is
different from the rate in the refund year. That is just part of the
law.

Where IRS goes off track is when its instructions cause the taxable
income ATTRIBUTABLE a refund to be more or less than the refund
amout. When the refund from an itemized deduction recovery is
included in AGI and there are AGI or MAGI based phase-outs of
deductions, exemption, exclusion, credits, etc.and the regular tax is
paid the taxable income attributable to the refund is almost always
greater than the refund. That is not what is not permitted under the
terms of section 111(a) of the Internal Revenue Code. Look at what
happens when state income tax refunds are included in the calculation
of taxable Social Security benefits.These instructions along with
others have cost taxpayers billions of dollars going back to at least
1984.

As I have noted previously, section 56(b)(1)(D) does not provide for
excluding tax refunds from gross income for purposes of determining
Alternative Minimum Taxable Income when the refunds are from years
when the regular tax was paid and the overpayments that produced the
refunds were deducted under paragraphs (1), (2), or (3) of section
164a). But IRS has not been deterred in doing just that since 1988.
That instruction has cost the Treasury billion of dollars.

"obvious intent"

That is not obvious to me. If Congress meant for "accrued in section
164(a) " to only apply to accrual basis taxpayers then it should said
that, and it didn't. It is sheer nonsense for a taxpayer to be
saddled with more than $10,000 in taxes simply because he received a
very large amount of income in the fourth quarter and paid the tax
after December 31 but by January 15 without penalty as provided by
law.

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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