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Tax Planning - owing tax in 2010 to claim deductible for 2011

Hi Folks,

I hope to consult this idea with you guys for tax planning this year: owe tax in 2010 to claim deductible for 2011. Below is the basic info and assumption:

  1. Our gross income increased about 40% from 2009 and we are under- paid for both Federal and State tax with projected rate till end of this year. Since our mortgage deductible is less than 2009, we could not get accurate estimate about whether or we can close the gap by December.

  1. Pay 110% of 2009 Federal and State Tax amount to avoid penalty for

2010.

  1. Claim extra state tax as 2011 deductible. We are living in California and extra state tax was deductible for 2009 return.

Here are the questions for pros and folks have similar experience: a. To avoid underpayment penalty, according to IRS Form 2210, it should be either 90% of current year tax or 110% of last year tax. Is the last year amount calculated from gross income or total withheld amount? b. Is there any interest required for the amount of underpayment? Is it beneficial for 2011 tax return with some amount owing to CA state? c. Any downside of the above plan?

Thank you very much! Richard

Reply to
Richard
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That works for federal and usually for CA. For 2010, if your income is over $1 million you cannot use prior year safe harbor.

Section 19136.3 of the Revenue and Taxation Code is added. This act provides that for taxable years beginning on or after January

1, 2009, the option for individual taxpayers to make estimate payments equal to 100% of the tax shown on the taxpayer?s return for the prior year is eliminated if the Adjusted Gross Income of the taxpayer shown on the return for the current taxable year exceeds $1 million, or $500,000 for taxpayers with a married filing separate filing status.

The $1 million is not adjusted for inflation, so it will affect everyone eventually. And the limit is $1 million for both single and married returns.

If your income increased 40%, you might be in AMT for 2010 and possibly 2011. Under AMT you don't get a deduction for your state income tax paid, as well as property tax paid. There will probably be an AMT patch for 2010, as there was for 2009, 2008, etc (but congress will pass the law next year), but you might still be in AMT despite the patch. If you're married and make over 200k, you'll probably be in AMT after the patch.

Total amount. And if your AGI is low enough it's only 100% of last year's total tax (not 110%).

There is no interest. That is if prior year safe harbor says you should be 8k and 2010 total tax is 20k, and tax withheld is 8k, you can pay the 12k on 4/15/2011 and there is no interest on it. Interest accrues if you pay after 4/15.

Reply to
removeps-groups

Don't you have to have the amount of liability under the prior year safe harbor paid by January 15, 2011, to avoid underpayment penalties, and then anything else you owe by April 15, 2011?

Reply to
caj111

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