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Posted by bono9763@yahoo.com 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.
No, this won't work. He will get a 2007 1099G from
California documenting his refund, which will have to be
added back to his income on his Federal tax return because
he itemized in 2006. So he will pay federal tax for it on
his 2007 return. But CA doesn't tax refunds, so it will be
subtracted from his CA return. But CA also doesn't allow
state tax paid as an itemized deduction, so when he filed
his 2006 return, he had to subtract the $5,000 from his
itemized deductions in the first place. So all he has done
is delay paying tax on the $5,000 from the 2006 return to
the 2007 return.
Dennis
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Posted by SMS on December 12, 2006, 2:15 am
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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.
Look at the TIP in the instructions:
"None of your refund is taxable if, in the year you paid the
tax, you either (a) did not itemize deductions, or (b)
elected to deduct state and local general sales taxes
instead of state and local income taxes."
He DID itemize deductions in the year he paid the tax, so it
is taxable.
I guess that it's possible, if you know that your income the
next year will be much lower, to overpay your state tax to
increase the deduction, then pay tax on the refund the next
year at a lower rate. I'd be surprised if the IRS doesn't
have some sort of limitation on this sort of income
shifting.
<< ======================================================= >>
<< 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 Katie on December 12, 2006, 2:15 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.
>
> 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.
Well, I think you can poke some holes in it if you put some
numbers into the state & local income tax refund worksheet.
The refund will be taxable income in 2007 to the extent his
total 2006 itemized deductions (including the extra $5,000
in state income tax), as limited by his 2006 AGI, exceed the
2006 standard deduction. (So plug in $5,150, etc. in place
of $5,000, etc. on Line 3 of the worksheet.)
In other words, the refund will be taxable income in 2007 to
the extent he gets a tax benefit from the deduction in 2006.
It's still a deferral, of course.
The deduction may be disallowed by the IRS to the extent
that it does not reflect a reasonable estimate of the state
tax due on his 2006 return. See, e.g., PLR 8222009,
2/26/1982.
Katie in San Diego
<< ======================================================= >>
<< 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 Stuart A. Bronstein on December 13, 2006, 10:38 pm
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.
>>
>> 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.
> In other words, the refund will be taxable income in 2007 to
> the extent he gets a tax benefit from the deduction in 2006.
>
> It's still a deferral, of course.
I wouldn't be so sure about that. It looks an awful lot like
a §1092 straddle to me.
Stu
<< ======================================================= >>
<< 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 Shyster1040 on December 12, 2006, 2:15 am
Please log in for more thread options Your friend has it figured incorrectly. To use the examples
of the 2005 tax year Form 1040, to the extent that his
itemized deductions exceeded $5,000 (assuming he's single,
and not head of household), the portion of his state income
tax refund that is taxable in 2006 for federal income tax
purposes is the lesser of (a) his actual tax refund, or (b)
the excess of his itemized deductions over $5,000. Since
he'd have made state income tax payments in excess of
$5,000, and since he itemized, his allowable itemized
deductions from line 28 of Schedule A (2005 Form 1040) would
have been at least $5,000. Thus, he would have had to
answer "YES" to the question on line 6 of the worksheet.
For example, assume that he paid california taxes of $6,000,
plus the additional $5,000 at year-end. Also assume that he
had other allowable itemized deductions of $2,050, for total
allowable miscellaneous deductions of $13,050 for 2005. In
2006 he would receive a check from California for $5,000
along with a Form 1099-G (a copy of which goes to the IRS).
Going through the worksheet, and assuming that he is single,
not blind or over 65, he would have the following entries:
Line 1: $5,000
Line 2: $13,050
Line 3: $5,000
Line 4: "NO," -0-
Line 5: $5,000 + $0 = $5,000
Line 6: "YES," $8,050 ($5,000 is less than $13,050 and
line 2 minus line 5 = $13,050 - $5,000 = $8,050)
Line 7: $5,000 (smaller of line 1 or line 6 - $5,000 is
smaller than $8,050)
Thus, the TAXABLE PART of your friend's refund would be
$5,000. In other words, the entire amount of the excess
that he paid over to California in December.
<< ======================================================= >>
<< 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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