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!
- posted 7 years ago