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Posted by Arthur Kamlet on December 12, 2006, 1:56 am
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> My co-worker (no, not me!) is convinced this will work. He
> is single, makes about $70-$80K, and lives in California and
> will itemize deductions in 2006 but not 2007. Oh, and he's
> annoying and keeps talking about this brilliant plan so I
> don't want this to work out for him:
>
> 1. This month (Dec 2006), send in a $5,000 extra for state
> taxes using California's 540-ES estimated tax form.
>
> 2. File CA state 2006 taxes as soon as possible in 2007 to
> get the $5,000 overpayment back by, say, March.
>
> 3. File federal 2006 taxes in April 2007, itemizing
> deductions, including that $5,000 overpayment.
>
> 4. In 2008, when it comes to file 2007 taxes, the $5,000 CA
> state tax refund he'll get back in March 2007 is apparently
> not taxable, at least according to the "State and Local
> Income Tax Refund Worksheet-Line 10" on page 24 on the 2006
> 1040 instructions.
I think he needs to re-read the instructions.
The instructions are applying the tax benefit rule, and
since he received the benefit from itemizing his 2006
deductions, the refund of his 2006 state tax will be
taxable.
__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
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Posted by Seth Breidbart on December 12, 2006, 1:56 am
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> My co-worker (no, not me!) is convinced this will work. He
> is single, makes about $70-$80K, and lives in California and
> will itemize deductions in 2006 but not 2007. Oh, and he's
> annoying and keeps talking about this brilliant plan so I
> don't want this to work out for him:
>
> 1. This month (Dec 2006), send in a $5,000 extra for state
> taxes using California's 540-ES estimated tax form.
>
> 3. File federal 2006 taxes in April 2007, itemizing
> deductions, including that $5,000 overpayment.
He'll lose the audit when they challenge the overpayment.
Seth
<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Herb Smith on December 12, 2006, 1:56 am
Please log in for more thread options FredK wrote:
> My co-worker (no, not me!) is convinced this will work. He
> is single, makes about $70-$80K, and lives in California and
> will itemize deductions in 2006 but not 2007. Oh, and he's
> annoying and keeps talking about this brilliant plan so I
> don't want this to work out for him:
>
> 1. This month (Dec 2006), send in a $5,000 extra for state
> taxes using California's 540-ES estimated tax form.
>
> 2. File CA state 2006 taxes as soon as possible in 2007 to
> get the $5,000 overpayment back by, say, March.
>
> 3. File federal 2006 taxes in April 2007, itemizing
> deductions, including that $5,000 overpayment.
>
> 4. In 2008, when it comes to file 2007 taxes, the $5,000 CA
> state tax refund he'll get back in March 2007 is apparently
> not taxable, at least according to the "State and Local
> Income Tax Refund Worksheet-Line 10" on page 24 on the 2006
> 1040 instructions.
This where his "plan" falls apart. The refund, to the extent
that he got a tax benefit from it the previous year IS
taxable in the year of the refund. Tell him to read the
instructions again.
<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Mark Bole on December 12, 2006, 1:56 am
Please log in for more thread options FredK wrote:
> How can an overpayment not be taxable the next year,
> especially if it is used just to result in reducing federal
> taxes the previous year?? This doesn't smell right but I
> can't poke a hole in it.
Oh, it's taxable alright. The 1040 instructions are not
being understood correctly. Since he itemized in 2006 (the
year he paid the state tax) and got a tax benefit, the
refund will be taxable in 2007 (whether or not he itemizes
in 2007 is irrelevant).
There are some detailed rules regarding the difference
between what he could have deducted and what he actually did
deduct, but in the end, rest assured this loophole has been
thoroughly closed.
There can be some net benefit if he knows that his marginal
tax rate will drop next year, since the deduction this year
could offset, say, 25% tax-rate income while the refund
might be taxable the following year at only 15%. But I've
also heard that CA tax authority sniffs this out and might
question the unjustified overpayment.
Ironically, until recent changes, when selling
non-residential real estate, the CA taxing authority forced
this situation themselves, by requiring withholding on the
sale that typically would far exceed the actual tax due.
-Mark Bole
<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Ira Smilovitz on December 12, 2006, 2:15 am
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> My co-worker (no, not me!) is convinced this will work. He
> is single, makes about $70-$80K, and lives in California and
> will itemize deductions in 2006 but not 2007. Oh, and he's
> annoying and keeps talking about this brilliant plan so I
> don't want this to work out for him:
>
> 1. This month (Dec 2006), send in a $5,000 extra for state
> taxes using California's 540-ES estimated tax form.
>
> 2. File CA state 2006 taxes as soon as possible in 2007 to
> get the $5,000 overpayment back by, say, March.
>
> 3. File federal 2006 taxes in April 2007, itemizing
> deductions, including that $5,000 overpayment.
>
> 4. In 2008, when it comes to file 2007 taxes, the $5,000 CA
> state tax refund he'll get back in March 2007 is apparently
> not taxable, at least according to the "State and Local
> Income Tax Refund Worksheet-Line 10" on page 24 on the 2006
> 1040 instructions.
>
> Net result: He has loaned the state of California $5,000
> interest-free for about 3 months, losing a little in
> interest (5% x 3/12 x $5000 = $62.50), but gaining $1,400
> (28% x $5,000) in reduced federal taxes.
>
> How can an overpayment not be taxable the next year,
> especially if it is used just to result in reducing federal
> taxes the previous year?? This doesn't smell right but I
> can't poke a hole in it.
He's completing the worksheet incorrectly. To the extent the
excess $5000 payment reduces his 2006 taxes, the refund
becomes taxable in 2007. State income tax refunds are not
taxable when you did NOT itemize the previous year.
Ira Smilovitz
<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>
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