Can I make just state estimated tax payments?

State and federal estimates are two completely different things.

The former. No problem.

Any state refund next year would be considered income if you itemize for 2008. You don't want to grossly overpay, but you can move the payments you want to make into 2008.

Well, that raises an interesting question. If I do grossly over pay and get a refund I will get a deduction for the overpayment, but won't have to pay tax on the refund; just the way AMT plays out according to taxcut.

Is that okay?

Without checking anything, that sounds highly unlikely to me.

There are at least two different views as to whether the instruction on Line 7 of Form 6251 that excludes from AMTI refunds of taxes that provided a tax benefit in the prior year when the regular tax was paid is consistent with section 56(b)(1)(D) of the Internal Revenue Code.

Here is the link to section 56 of the Internal Revenue Code.

Here is section 56(b)(1)(D)

(D) Treatment of certain recoveries No recovery of any tax to which subparagraph (A)(ii) applied shall be included in gross income for purposes of determining alternative minimum taxable income.

Here is section 56(b)(1)(A)(ii) which is referenced in section 56(b)(1) (D).

b) Adjustments applicable to individuals In determining the amount of the alternative minimum taxable income of any taxpayer (other than a corporation), the following treatment shall apply (in lieu of the treatment applicable for purposes of computing the regular tax): (1) Limitation on deductions (A) In general No deduction shall be allowed - (ii) for any taxes described in paragraph (1), (2), or (3) of section 164(a). Clause (ii) shall not apply to any amount allowable in computing adjusted gross income.

Note: State and local income taxes are among the taxes described in section 164(a).

Here is a question that you might want to consider in determining for yourself if the instruction is correct.

How would the instruction for line 7 on Form 6251 (2007) change if section 56(b)(1)(D) of the Internal Revenue Code were amended to read as follows?

(D) Treatment of certain recoveries No recovery of any tax to which paragraphs (1), (2), or (3) of section

164(a) applied shall be included in gross income for purposes of determining alternative minimum taxable income. Subparagraph D shall not apply to the recovery of a tax which was allowed as a deduction in computing adjusted gross income.

Here is the reason for the question.

Since 1988 IRS instructions have provided for excluding from AMTI tax refunds that were deductible under paragraphs (1), (2), or (3) of section 164(a) in years that only the regular tax was paid as well as those that were not deductible in a year the AMT was paid under section 56(b)(1)(a)(ii). During the period 1988 through 2007 neither the income used for a tax overpayment that produced a tax benefit in the year the regular tax was paid nor the refund of that overpayment in a year the AMT was paid been taxed directly. Interestingly, according to IRS Instructions both the income used for the overpayment and the refund of the overpayment could have reduced the allowable medical expense deduction during the period 1988 through 2007 except for tax year 2003.

Here is a link to Tax Correspondence that was published in Tax Analysts Tax Notes Today that addresses the issue raised.

See paragraph [74] where the issue that you raised is discussed by the IRS respondent.

You might want to look at paragraph [59] also. What is stated there by the IrS respondent does not take into account that, since 1997, a state income tax overpayment, for example, could have produced a tax benefit in a year the AMT was paid if the taxpayer's regular income excluding capital gains was below the threshold for the 25 percent regular tax rate. In that situation, the tax overpayment can produce a tax benefit because the overpayment can cause more of the capital gains to be taxed at 0 percent and fewer of the gains to be taxed at

15 percent (tax year 2008). See IRS publication 525 for the method of determining if the deduction of a recovered item produced a tax benefit.

As I stated previously there are two view as to the tax treatment of tax refunds under the circumstances that you described, one view is consistent with the Internal Revenue Code and then there is IRS's view!

Cheers,

WDK

Well Brownie, maybe you ought to check.

Cheers,

WDK

Agreed.

If you are subject to AMT in both year of payment and year of refund, it's a wash, neither the deduction nor the refund applies.

The OP's scenario is high income in Year 1 due to capital gains, relatively low income in Year 2. If AMT applies at all, it is likely to apply in Year 1 and the deduction for estimated taxes won't help, although in that case, the Year 2 refund should be non-taxable or only partly taxable.

Even if you get a deduction under regular tax in Year 1, and in Year 2 when you get the refund you are subject to AMT, you really need to understand that AMT is a *floor* amount, it will never take you below what your regular tax would be. Under regular tax, your refund would be taxable; therefore under AMT you are not going to get any break due to that taxable refund somehow not being taxed. If you become subject to AMT, you are going to pay every bit of that tax *plus* more.

There is a loophole of sorts in that you can shift some income from one year to the next under regular tax rules by "grossly overpaying" estimated state taxes. To me it comes down to the government requiring quarterly payments but only issuing annual refunds, it can be used against as well as for the benefit of the government. Generally this is a one-time-only thing, just like prepaying a semi-annual property tax bill or making 13 monthly mortgage payments in one year.

-Mark Bole

snipped-for-privacy@aol.com wrote: [...]

I almost mentioned in my previous reply how there was some subtlety to the issue of taxable recoveries of state tax refunds, and I recollected some long discussions on this issue in the unmoderated newsgroup. Now it's all coming back to me! ;-)

First, let's note that the OP (Ted) made only the vaguest of references to AMT, and did not specify in his question which tax system applied in which year. Obviously that makes all the difference when discussing results.

To cut straight to practicality, I did a quick check in Turbotax and in the situation where taxpayer is subject to AMT in 2006 and got a refund in 2007, they indicate that the simplest thing is to just pay tax on the full amount, even if it results in overpaying. But, if you want to do a lot more work (or get your hands on a copy of your return in Turbotax

2006), they guide you through re-calculating your 2006 taxes with a deduction only for the actual state tax you owed (amount paid/deducted less refund amount). Then, if your original 2006 tax bill was less than what it would have been under the recalculation, only the difference is the partly taxable portion of the refund for 2007 (which, of course, might then be excluded when calculating AMT for 2007).

Does this method implement what WDKebschull refers to as the IRS view or the tax code view? I checked Pub 525, and while it mentions the "recalculate 2006" method, it doesn't provide a worksheet the way Turbotax does, which also takes into account unused tax credits, negative income, and other special cases mentioned in the pub.

-Mark Bole

Indeed there are - the correct view and WDK's view.

Mark:

I agree with with the procedure used in Publication 525 to determine if there as a tax benefit from a state income tax refund in a year the AMT was paid. The first impression is there cannot be a tax benefit from a state income tax overpayment because state income taxes are not allowed as deductions in determining AMTI.

However, if you go to page 2 of Form 6251 you will find that a state income tax overpayment included on Schedule A in a year that the AMT is paid can produce a limited tax benefit by causing more capital gains to be taxed at 5 percent and fewer capital gains to be taxed at

15 percent (tax year 2007).

The problem occurs going forward from the determination that there was a tax benefit. IRS instructions would have you paying the regular tax on the refund of that overpayment in a year that only the regular tax is paid after the income used for the overpayment was taxed at the AMT rate of 26 or 28 percent.

Following the provisions in section 111(a) of the IRC, the portion of a refund of the tax overpayment that produced a limited long-term capital gains rate tax benefit in a prior year when the AMT was paid should only be included in gross income FOR PURPOSES OF DETERMINING THE TAX ON CAPITAL GAINS in a year when only the regular tax is paid. When the AMT is paid in both years, a refund of a tax overpayment that produced a limited lon-term capital gains rate tax benefit in Year 1 is excluded from AMTI in Year 2 but is included in the calculation of capital gains under the AMT in that year. Thus, there is NO violation of the IRC

However, when the AMT is paid in one year and the regular tax is paid in the other year following IRS instructions can produce DOUBLE OR NOTHING TAXATION of the income/refund related to a state income tax overpayment depending on the sequence in which the regular tax and the AMT is paid. This is not what is provided by the IRC.

BTW, IRS has accepted returns that I have filed when I followed the IRC regarding the tax treatment of state income tax refunds rather than IRS instructions when the AMT was paid in one year and the regular tax was paid in the other. They have also accepted amended returns where I reduced the taxable income attributable to a state income tax refund from being more than twice the amount of the refund as determined using IRS instruction to being equal to the refund as provided by section 111(a) of the Internal Revenue Code. The original returns (my father"s) were "professionally prepared" by the "professionals" who were responsible of determining his estimated state income taxes.

Cheers,

WDK

According to TaxCut, I can overpay 150% in 2008 without getting into AMT. I will be in AMT already in 2009 because I will have substantial deductions without great income. So overpaying in 2008 and getting a refund in 2009 will increase my regular tax, but it won't exceed my AMT tax. In fact, Taxcut shows I will save $1,000!

The discussion has gotten rather too technical for me. I gather the consensus opinion is that even though it "works" the IRS won't like it. Is that correct.

I appreciate the comprensive answer, but it is way over my head.

I find that Taxcut says I don't run into AMT in 2008 until I pay 150% of my actual state income tax. Obviously I will get the 50% back as a refund in 2009, but I will already be in AMT because I will have high deductions in 2009 but slight income. So the refund increases my normal tax, but reduces my AMT. In effect the refund is taxfree in 2009. So I get a big tax benefit in 2008, but no extra tax in 2009.

Are you saying if I did this, I would have to refile 2008 without the extra state estimated tax or pay extra tax in 2009?

Seems fine to me. See the thread " Is it okay to be optimistic on State Estimated Taxes?" in this newsgroup. You should run your scenarios through a computer program to be sure. One person on that thread said that it might be fraud to do this.

Couldn't the deduction help a little? If you're in the 33% bracket and subject to AMT, then an additional $10 income would save you $3.33 on your regular tax, but you add back $2.80 through the AMT; so your net benefit is 5%. Or is something wrong with my formula?

It depends. See paragraph [74] in this link,

What the IRS attorney states in the letter that contains paragraph [74] is basically a pact of lies to the extent that he claims that the Internal Revenue Code allows "DOUBLE OR NOTHING TAXATION" OF state income tax refunds.

The IRS attorney states that IRS MIGHT take exception to what you are planning. But that MIGHT be a can of worms that IRS would be reluctant to open.

As far as including the refund in the calculation of the AMTI in 2009, it depends on whether the IRS decides to bring the instruction on Line

7 of Form 6251 into compliance with the Internal Revenue Code. Section 56(b)(1)(D) does not permit the exclusion of refunds that provided a tax benefit in a prior year when the regular tax was paid. But that has not deterred IRS from issuing instructions that exclude those refunds form AMTI since 1988.

If you did what you have indicated that you are considering and IRS took exception, you could go into court and blow-up a multibillion dollar fraud on the United States Treasury that IRS perpetrated since

1988. Sometimes you have to look beyond current self interest!

Cheers,

WDK

Who knows what IRS might do! What I am saying is that, while IRS instructions and tax software produce the results that you have indicated, the IRS instructions are fraudulent

Here is the link to Tax Correspondence that was published in Tax Analyst in 1999 that addresses the issue that you raised.

The four letters that were published were two from me and two responses from IRS.

Here is what an IRS attorney wrote in paragraph [59] in one of those letters regarding one of the issues that you raised. As explained below, it is pure rubbish as is most of his letter.

" [59] As stated in prior correspondence we disagree with your assertion that recoveries of taxes described in paragraphs (1), (2), or (3) of section

164(a) should only be excluded from gross income in computing AMTI to the extent deduction of the taxes did not reduce the taxpayer's income tax liability. Under your interpretation section 56(b)(1)(D) would be unnecessary; it would only apply to exclude items from gross income when such items are already excluded from gross income under section 111."

What the IRS respondent wrote in paragraph [59] was pure rubbish when published in Tax Analysts. What was ignored was that since 1997 there could have been be a limited long-term capital gains rate based tax benefit (LLTCGRBTB) in a year that the AMT was paid as a result of a tax overpayment claimed on Schedule A. Section 56(b)(1)(D) is necessary to preclude the inclusion of the refund of the tax overpayment that produced the LLTCGRBTB in AMTI . Thus DOUBLE TAXATION of the income/refund is avoided.

See page 2 of Form 6251 for 2007 and there you will find that capital gains may be taxed at either 5 or 15 percent. Until the total of capital gains and other taxable income exceed the threshold for the 25 percent tax rate, capital gains were taxed at 5 percent in 2007. Once the total exceeds the threshold for the 25 percent tax rate, the excess capital gains are taxed at 15 percent. In 2008 the 5 percent rate is reduced to zero. Itemized deductions claimed on Schedule A reduce ?other taxable income? and thus can cause more of the capital gains to be taxed at the lower capital gains rate and fewer at the higher rate, thus a tax benefit which is revealed by instructions in IRS Publication 525.

The thing you need to avoid is having a LLTCGRBTB in a year that the AMT is paid and then paying the regular tax in the refund year. First the income used for the tax overpayment is included in AMTI and then the refund is included in regular taxable income per FRAUDULENT IRS instructions. The refunds in that situation should only impact the calculation of the capital gains portion of the regular tax per section 111(a) of the IRC.

What will IRS do if you grossly overpay you state income tax in 2008? Here is what the IRS attorney wrote in paragraph [74] on that issue.

[74] It is true that a taxpayer who anticipates paying the regular tax in one taxable year and the AMT in the succeeding taxable year, may, in some circumstances, achieve tax savings by overpaying state income taxes in the first taxable year. However, there are many situations in which taxpayers have opportunities to lessen their tax liability by shifting income and deductions from one taxable year to another taxable year, e.g., deferring income until retirement when taxpayers may be subject to lower marginal tax rates. Many taxpayers subject to the AMT tend to be subject to it on a recurrent basis so that overpaying state income taxes may be of limited benefit. To the extent a taxpayer grossly overpays state income taxes the Service might challenge the propriety of the deduction. In any event, the fact that there may be some planning opportunities available by overpaying state income taxes does not justify ignoring the clear language of section 56(b)(1)(D).

Actually, IRS has ignored the clear language in section 56(b)(1)(D) since 1988 by allowing what you are considering. It is somewhat unlikely that IRS would challenge what you are considering because doing so would expose their multibillion fraud on the Treasury.

Cheers.

WDK