Smoothing year to year income taxes

On years with lumps of income I used to smooth it out federally by paying state
income tax prepayment due Jan 15 earlier at Dec 30 and increasing it. Maybe just
moving it helps, due to it vanishing from that years deductions and appearing in
the year that you most need deductions. Helps for instance when a large
long-held mutual fund gets liquidated.
This accidentally happened to me in the split-and-delay Roth conversion tax
program that you all recommended against. On hindsight, I should have Rothified
half, skipped a year to smooth income, then done (and smoothed) the other half.
But next year I face terrible pitfalls unless jacking up that prepayment
What happened was when the Roth conversion happened, the feds of course let me
skip a year but the state did not. This gave a brutal state income tax which
suggested brutal estimated payments for the next year (to avoid the penalty
possibility). The second year where feds include half of the Roth treated as
income, it is somewhat painless due to the huge deductible state prepayments.
But the third year the state refund (even if rolled over, and more estimated
payments made) will accumulate with the half-roth to jack up the federal income
to absurd levels.
So bottom line this enticing delay-and-split Roth program was a disaster and
pushed the whole lump into the first year for the state and into the third year
for the feds. With a lack of deductions, the only way to make it more "fair"
seems to double my already triple state prepayments this December!
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Well, I haven't visited this group in years so I don't know the history of posts you refer to.
However, by December you should have a pretty good idea of what your state tax liability for 2012 will actually be. In your position, I would prepay only enough to hit that amount (plus maybe a little bit to reduce the chance of bad surprises).
Doesn't your state require that estimated payments be equal throughout the year to avoid underestimated penalties?
Good luck.
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Bill Brown
Thanks, but my clumsy trick is to wildly overpay my December state estimated to create a significant federal deduction. This fed deduction is needed to smooth out roth conversion income which pushes me to higher federal tax rates.
However, I did the one-time deal where my roth conversion is split into 2 conseq years. So now if I do that trick the second time, I believe it will be cancelled out by the state returning the first excess as a refund this year. So I have to double this December overpay to have the same effect.
It's so unfair the way the feds treat massively variable income from year to year. I wonder what it takes to get classified in the magic exception category as fisherman or the other boom and bust occupation where they allow year to year smoothing. Or any other technique.
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