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Subject Author Date
Overpay state tax on purpose to get a higher federal refund FredK 12-10-2006
Posted by JB 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.

Hard to believe the $5,000 isn't taxable for 1040 purposes.
If he itemized for 2006, that's what's used on the
worksheet, not 2007. Your co worker could spend his time
selling the idea if it would work.

Jeff Berk
Jenkintown, PA

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<< that may be imposed upon the taxpayer. >>
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Posted by Katie on December 15, 2006, 9:59 am
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 Stuart A. Bronstein wrote:

>> 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 =A71092 straddle to me.

Seems like a stretch to me to call it "offsetting
positions." However, that is another way the IRS might
attack it.

I think someone else pointed out that, ironically,
California law actually REQUIRES some individual taxpayers
to grossly overpay their state taxes. Purchasers of
California real property are required to withhold 3-1/3
percent of the sale price and pay it over to the state. This
is often a great deal more than the actual tax liability of
the seller relating to the sale. The seller gets the refund
the following year when the return is filed.

Beginning in 2007, individual sellers can elect to have the
buyer withhold 9.3 percent of the gain (the highest
individual income tax rate) rather than 3-1/3 percent of the
gross. =20

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. >>
<< ======================================================= >>

Posted by Katie on December 15, 2006, 10:05 am
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Stuart A. Bronstein wrote:

>> 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 =A71092 straddle to me.

Seems like a stretch to me to call it "offsetting
positions." However, that is another way the IRS might
attack it.

I think someone else pointed out that, ironically,
California law actually REQUIRES some individual taxpayers
to grossly overpay their state taxes. Purchasers of
California real property are required to withhold 3-1/3
percent of the sale price and pay it over to the state. This
is often a great deal more than the actual tax liability of
the seller relating to the sale. The seller gets the refund
the following year when the return is filed.

Beginning in 2007, individual sellers can elect to have the
buyer withhold 9.3 percent of the gain (the highest
individual income tax rate) rather than 3-1/3 percent of the
gross. =20

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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