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state taxes and deduction bunching

I'm interested in shifting state taxes as part of a deduction-bunching strategy. The year 2010 will be an itemized-deduction year for me, and 2011 a standard deduction year. For this reason I'd like to pay as little state tax in 2011 as possible (minimize withholding and estimated taxes). But, since I'll have some state-taxable income in 2011, I'll have a state tax liability. I see two ways around this.

One is to simply have a big state tax bill, payable in 2012 when I file my 2011 return. Yes, I'll pay 5% or so interest, but meanwhile I saved 25% (or whatever my fed marginal rate is) on the state tax payment I shifted from the standard-deduction year 2011 to the next itemized-deduction year 2012. Or maybe the penalty will be much larger, since I so obviously underpaid in 2011 ?

Another is to grossly over-withhold state taxes in 2010, so I have a big state tax refund on my 2010 return, but to check the box to put that refund towards my 2011 taxes. Then I won't need to withhold anything in 2011 to avoid a penalty (I will have "prepaid" my 2011 state taxes). But, I have a sneaky feeling that the state will still send me a 1099- G for that refund, even though I put it towards next year's taxes, so this scheme won't work either.

Thoughts ? Thanks.

Reply to
JGE
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That works from a Federal standpoint. You'll have to check your state rules for details about the penalty amount.

That won't work. Your state refund for 2010, received in 2011, will be taxable on your 2011 Federal return whether you take the state refund in cash or have it applied to 2011 state taxes. If you make state estimated payments do be sure to pay your last one in December

2010 rather than waiting for the January due date.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

You also need to consider whether the extra state income tax deduction triggers the AMT. Part of the problem here is knowing if Congress will, yet again, temporarily raise the exemption. They haven't, yet, for 2010.

Years ago, I was in the same situation that you were (i.e., bunching deductions in one year and taking standard deduction the next; I would even prepay first and second quarter property taxes and take the penalty on the 3rd and 4th quarter payments), but when it came to state income tax, I also discovered that the taxable refund couldn't be avoided by applying it to estimated tax.

What I also read, somewhere, is that we can't deliberately way overpay state income tax as a means of shifting income into the next year (i.e., make a huge 4th quarter payment in December because we're in a much higher bracket this year and paying a much lower rate next year on the refund), but I don't know of specific guidelines or how this is determined.

Reply to
Stan K

Mostdef, job number one is to make sure I don't pay any of my 2010 taxes in 2011, whether it be tax due with my return or the due-Jan-2011 estimated payment. But thanks for the reminder.

What I'm trying to do is to pay some of my 2011 taxes in 2010 ! It looks like that ain't gonna happen - thanks for the clarification of what I assumed was probably the case (that a big refund is federal income even if you apply it to next year's tax, kinda analogous to being taxed on a reinvested dividend).

So the other option is to pay as much of my 2011 taxes in 2012 as possible, so, as Phil says, I need to check the penalty guidelines carefully.

Thanks all !

Reply to
JGE

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