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Posted by Jessica on April 24, 2008, 8:49 pm
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I didn't earn much money last year, so my 2008 W2 withholding will be enough
to put me in safe harbor for 2008 without any estimated tax payments.
However I am selling my business this year and will substantial capital
gains, while 2009 will be pretty small. As such I won't benefit from the
deduction on State income tax if I pay it next year with my tax return, so I
want to pay estimated tax this year so I get the deduction in 2008.
The interesting thing, and the subject of my question, is that if I
optimistically assume the stock market will go up 25% and pay state
estimated tax accordingly, I maximize my 2008 deduction and reduce my 2008
Federal tax. If the market does not go up that much I will get a big state
tax refund in 2009 and have to pay 2009 Federal tax on it, but thanks to the
magic of AMT and very little income in 2009, the 2009 tax will be much less
than the 2008 savings.
We all know the stock market probably isn't going up 25% this year, but it
could.
Is there anything wrong with paying state estimated taxes optimistically,
when I am not paying federal estimated taxes at all?
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Posted by removeps-groups@yahoo.com on April 25, 2008, 6:31 pm
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> The interesting thing, and the subject of my question, is that if I
> optimistically assume the stock market will go up 25% and pay state
> estimated tax accordingly, I maximize my 2008 deduction and reduce my 2008
> Federal tax. If the market does not go up that much I will get a big state
> tax refund in 2009 and have to pay 2009 Federal tax on it, but thanks to the
> magic of AMT and very little income in 2009, the 2009 tax will be much less
> than the 2008 savings.
> Is there anything wrong with paying state estimated taxes optimistically,
> when I am not paying federal estimated taxes at all?
There does not seem to be anything wrong with it, and it seems to be a
smart idea. Let's see if I get it right: Your normal AGI, federal
tax, state tax every year is for example 60k, 9k, 3k. But in 2008 you
expect large capital gain of say 200k. Your AGI and state tax would
be 260k and 22k. If you take advantage of the prior year safe habor
and pay the 22k state tax in 2009, you get the itemized deduction of
22k on your federal return only in 2009. But if you make estimated
payments of 22k in 2008, then you get the benefit of the 22k deduction
in 2008, which should be better in theory because you are in a higher
tax bracket in 2008.
But there's a chance that you will be in AMT in 2008. So even though
you get to deduct the state tax of 22k, you may add it back through
AMT. Be sure to run your scenarios through a computer program. In
scenario 1 you don't make any state estimated payments in 2008, and in
scenario 2 you make estimated payments of 22k; in both your 2008
income is the same (large), and 2009 income is the same (small).
Note that in paying 22k equally during 2008 you lose the benefit of
earning interest on it. You could pay the 22k in late December
though. Be sure that you're in the prior year safe habor for your
state as well, otherwise they will hit you with interest because your
estimated payment was not received by the due dates. Be careful how
you invest your money though. I read an article about people who put
their money into money market treasury funds, but because banks
stopped bidding for treasuries, the money market funds dried up or
something like that. See "The "Other Cash Crisis" in
http://www.auctionratepreferreds.org/, so be careful where you park
your money.
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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 Jessica on April 25, 2008, 7:16 pm
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>
>> The interesting thing, and the subject of my question, is that if I
>> optimistically assume the stock market will go up 25% and pay state
>> estimated tax accordingly, I maximize my 2008 deduction and reduce my
>> 2008
>> Federal tax. If the market does not go up that much I will get a big
>> state
>> tax refund in 2009 and have to pay 2009 Federal tax on it, but thanks to
>> the
>> magic of AMT and very little income in 2009, the 2009 tax will be much
>> less
>> than the 2008 savings.
>
>> Is there anything wrong with paying state estimated taxes optimistically,
>> when I am not paying federal estimated taxes at all?
>
> There does not seem to be anything wrong with it, and it seems to be a
> smart idea. Let's see if I get it right: Your normal AGI, federal
> tax, state tax every year is for example 60k, 9k, 3k. But in 2008 you
> expect large capital gain of say 200k. Your AGI and state tax would
> be 260k and 22k. If you take advantage of the prior year safe habor
> and pay the 22k state tax in 2009, you get the itemized deduction of
> 22k on your federal return only in 2009. But if you make estimated
> payments of 22k in 2008, then you get the benefit of the 22k deduction
> in 2008, which should be better in theory because you are in a higher
> tax bracket in 2008.
>
> But there's a chance that you will be in AMT in 2008. So even though
> you get to deduct the state tax of 22k, you may add it back through
> AMT. Be sure to run your scenarios through a computer program. In
> scenario 1 you don't make any state estimated payments in 2008, and in
> scenario 2 you make estimated payments of 22k; in both your 2008
> income is the same (large), and 2009 income is the same (small).
>
I ran it all through TaxCut 2007 and I avoid AMT. So unless there are big
changes I am okay. Even if there are changes, the worst that can happen is
that I lose it either way.
I just wanted to make sure it wasn't some sort of tax fraud; you never
know...
--
<< ------------------------------------------------------- >>
<< 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 April 29, 2008, 4:20 pm
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> I just wanted to make sure it wasn't some sort of tax fraud; you never
> know...
It might be deemed "tax fraud" if you deliberately overpaid your state
income taxes in a year that you paid the regular tax to get the tax
benefit from the overpayment AND
this was done in anticipation of paying the AMT the next year. Have
you noticed that IRS instructions exclude ALL state income tax and
certain other tax refunds from Alternative Minimum Taxable Income.
See Line 7 on Form 6251 and section 56(b)(1)(D) of the Internal
Revenue Code and draw your own conclusions
Tax Fraud? You are aware that IRS instructions include state income
tax refunds in the calculation for nearly 30 thirty provisions in the
Internal Revenue Code. It's the old AGI phase-out game. Like the
exemption for Social Security benefits and medical expense deductions
or the retirement savers credit. In virtually every instance the tax
overpayment has no impact on taxes paid other than the dollar for
dollar reduction in taxable income and and any associated effect on
capital gains taxes, but inclusion of the refunds in the calculation
can sure increase taxes in the refund year ... in some cases the
taxable income attributable to the refund can be more than twice the
amount of the refund.
See the National Taxpayer Report to Congress for 2006 for a listing
of
the items on a return impacted by the AGI phase-out. In addition to
the items on the list, there are medical, miscellaneous, and
casualty and theft loss deductions, and in 2007 the mortgage
insurance deduction, (or mabybe 2008) the refundable AMT credit.
Pick your poison!
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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Posted by removeps-groups@yahoo.com on April 30, 2008, 9:42 pm
Please log in for more thread options On Apr 29, 1:20 pm, KEBSCHU...@aol.com wrote:
> It might be deemed "tax fraud" if you deliberately overpaid your state
> income taxes in a year that you paid the regular tax to get the tax
> benefit from the overpayment AND
> this was done in anticipation of paying the AMT the next year. Have
> you noticed that IRS instructions exclude ALL state income tax and
> certain other tax refunds from Alternative Minimum Taxable Income.
> See Line 7 on Form 6251 and section 56(b)(1)(D) of the Internal
> Revenue Code and draw your own conclusions
The original post seemed to be about the paying the exact amount of
state taxes in 2008 instead of taking advantage of safe habor, not
about overpaying if I read right.
As for the overpayment case you cited, is it really fraud and have
there been any court cases on it?
And say you overpaid state tax by 12k in year 1 when you were not in
AMT and in 25% bracket to save you 3k, then in year 2 you are in 33%
bracket and AMT, your ordinary tax has 12k tax refund as income, on
which your regular tax increases by 4k. It looks like you've lost 1k
by overypaying state taxes. The 12k is not subject to AMT. So say
your AGI (with the 12k refund) is 262k; your AMT taxable income is
250k. If you didn't make the 12k overpayment in the previous year,
the AMT taxable income would still be 250k (and the AGI would be
250k). So the AMT tentative tax is the same either way. So there's
no fraud here as I see it, as you've lost 1k by this strategy.
> Tax Fraud? You are aware that IRS instructions include state income
> tax refunds in the calculation for nearly 30 thirty provisions in the
> Internal Revenue Code. It's the old AGI phase-out game. Like the
> exemption for Social Security benefits and medical expense deductions
> or the retirement savers credit. In virtually every instance the tax
> overpayment has no impact on taxes paid other than the dollar for
> dollar reduction in taxable income and and any associated effect on
> capital gains taxes, but inclusion of the refunds in the calculation
> can sure increase taxes in the refund year ... in some cases the
> taxable income attributable to the refund can be more than twice the
> amount of the refund.
>
> See the National Taxpayer Report to Congress for 2006 for a listing
> of
> the items on a return impacted by the AGI phase-out. In addition to
> the items on the list, there are medical, miscellaneous, and
> casualty and theft loss deductions, and in 2007 the mortgage
> insurance deduction, (or mabybe 2008) the refundable AMT credit.
>
> Pick your poison!
>
> 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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