Is it okay to be optimistic on State Estimated Taxes?

There does not seem to be anything wrong with it, and it seems to be a smart idea. Let's see if I get it right: Your normal AGI, federal tax, state tax every year is for example 60k, 9k, 3k. But in 2008 you expect large capital gain of say 200k. Your AGI and state tax would be 260k and 22k. If you take advantage of the prior year safe habor and pay the 22k state tax in 2009, you get the itemized deduction of

22k on your federal return only in 2009. But if you make estimated payments of 22k in 2008, then you get the benefit of the 22k deduction in 2008, which should be better in theory because you are in a higher tax bracket in 2008.

But there's a chance that you will be in AMT in 2008. So even though you get to deduct the state tax of 22k, you may add it back through AMT. Be sure to run your scenarios through a computer program. In scenario 1 you don't make any state estimated payments in 2008, and in scenario 2 you make estimated payments of 22k; in both your 2008 income is the same (large), and 2009 income is the same (small).

Note that in paying 22k equally during 2008 you lose the benefit of earning interest on it. You could pay the 22k in late December though. Be sure that you're in the prior year safe habor for your state as well, otherwise they will hit you with interest because your estimated payment was not received by the due dates. Be careful how you invest your money though. I read an article about people who put their money into money market treasury funds, but because banks stopped bidding for treasuries, the money market funds dried up or something like that. See "The "Other Cash Crisis" in

so be careful where you parkyour money.

I ran it all through TaxCut 2007 and I avoid AMT. So unless there are big changes I am okay. Even if there are changes, the worst that can happen is that I lose it either way.

I just wanted to make sure it wasn't some sort of tax fraud; you never know...

" snipped-for-privacy@yahoo.com" wrote in news: snipped-for-privacy@l17g2000pri.googlegroups.com:

I don't think treasuries have anything to do with that. My city had a bond issue done through the auction-rate market. Since the auctions failed the city is having to pay a reset interest of around 6%. The city plans to float a conventional bond issue and call the auction rate bonds in. So those who own these bonds are getting a decent interest and will be repaid at par eventually.

scott s. ..

It might be deemed "tax fraud" if you deliberately overpaid your state income taxes in a year that you paid the regular tax to get the tax benefit from the overpayment AND this was done in anticipation of paying the AMT the next year. Have you noticed that IRS instructions exclude ALL state income tax and certain other tax refunds from Alternative Minimum Taxable Income. See Line 7 on Form 6251 and section 56(b)(1)(D) of the Internal Revenue Code and draw your own conclusions

Tax Fraud? You are aware that IRS instructions include state income tax refunds in the calculation for nearly 30 thirty provisions in the Internal Revenue Code. It's the old AGI phase-out game. Like the exemption for Social Security benefits and medical expense deductions or the retirement savers credit. In virtually every instance the tax overpayment has no impact on taxes paid other than the dollar for dollar reduction in taxable income and and any associated effect on capital gains taxes, but inclusion of the refunds in the calculation can sure increase taxes in the refund year ... in some cases the taxable income attributable to the refund can be more than twice the amount of the refund.

See the National Taxpayer Report to Congress for 2006 for a listing of the items on a return impacted by the AGI phase-out. In addition to the items on the list, there are medical, miscellaneous, and casualty and theft loss deductions, and in 2007 the mortgage insurance deduction, (or mabybe 2008) the refundable AMT credit.

Pick your poison!

Cheers,

WDK

The original post seemed to be about the paying the exact amount of state taxes in 2008 instead of taking advantage of safe habor, not about overpaying if I read right.

As for the overpayment case you cited, is it really fraud and have there been any court cases on it?

And say you overpaid state tax by 12k in year 1 when you were not in AMT and in 25% bracket to save you 3k, then in year 2 you are in 33% bracket and AMT, your ordinary tax has 12k tax refund as income, on which your regular tax increases by 4k. It looks like you've lost 1k by overypaying state taxes. The 12k is not subject to AMT. So say your AGI (with the 12k refund) is 262k; your AMT taxable income is

250k. If you didn't make the 12k overpayment in the previous year, the AMT taxable income would still be 250k (and the AGI would be 250k). So the AMT tentative tax is the same either way. So there's no fraud here as I see it, as you've lost 1k by this strategy.

If the AMT tentative tax exceeds the regular tax anyway, then you've gained $3k.

Seth

No, the overpayment is exactly what I am talking about. I want to pay more than I really expect to need because the deduction this year will exceed the tax on the refund next year.

Now... it is actually possible the overpayment will actually turn out to be correct; it is just not likely. If this is fradulent, then I don't want to do it, but it if isn't, then I will forgo use of the money for a few months.

Can you give more details please?

AMT tentative tax: $50,000.

Regular tax (without the refund): $45,000.

Regular tax (including the refund): $48,000.

So in year 2, he pays $50,000 either way.

Seth