Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Is This Tax Idea Crazy/Possible?
Old 04-21-2017, 05:46 PM   #1
Dryer sheet wannabe
 
Join Date: Sep 2012
Location: Clayton
Posts: 13
Is This Tax Idea Crazy/Possible?

I have always been thinking of weird ways to reduce taxes. The last few years I have had small state refunds and it got me to thinking.

You are allowed to reduce your fed taxable by the amount you had withheld for state taxes if you itemize. But if that causes you to get a refund from the state it is counted as income the next year.

So here is the idea. If this is your last year of work before retirement and you want to save on taxes try this.

My work lets me add an extra amount to be withheld from my check for taxes if I want. What if I made 100k that year and had them withhold 50K for state taxes. Now my taxable income would be reduced by 50k so I would be in a lower bracket that year. Then the following year you are retired and have no income but will get a state refund for the 50K and be in the low bracket again. This assumes you could live of the 50k each year.

So what do you think? I have not seen it discussed before. Have I invented a new way for people to reduce their taxes on the way out of their job?
__________________

borrom2002 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-21-2017, 06:01 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 15,302
Hmmm... an interesting thought....

So... first I went to the IRS to see.... I do not see any limit on my quick search, but did see this...
To be deductible, the tax must be imposed on you and you must have paid it during your tax year.

Now, I wonder if that would trigger an audit and them saying that there is no way that the tax was 'imposed' on you.... that you were doing it to lower your current taxes....


Here is an interesting one which says to pay your Jan estimate early to get the benefit.... but, you need to be careful of the AMT.... so I would think that YOU need to be careful of the AMT... do a quick check and see...

Year-End Tax Planning Using the State Income Tax Deduction

The state income tax deduction is useful in year-end tax planning, as taxpayers can choose to increase their state tax payments to cover any expected state liability that will occur for the year. For example, taxpayers can pay their fourth state estimated tax payment, normally due January 15, in December. This would boost a person's itemized deductions and can potentially reduce the federal tax liability for the year. Before accelerating their state income tax payments, taxpayers should check to see if increasing state tax payments at the end of the year will impact their federal return. Taxpayers who are impacted by the alternative minimum tax likely will find they receive little or no benefit on their federal return.




The deduction for state and local income taxes is an adjustment item when calculating the alternative minimum tax (AMT). This means that state and local income taxes are deductible when calculating the regular federal income tax, but not deductible when calculating the AMT. Taxpayers who have AMT liabilities generally receive little or no benefit from deducting state and local income taxes.


https://www.thebalance.com/state-inc...uction-3192840








SOOO, looking at the second article I would say NOOO, it will not work as you intend...
__________________

Texas Proud is offline   Reply With Quote
Old 04-21-2017, 06:21 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2009
Posts: 5,194
Over the last few years, I have toyed with the idea of bunching my itemized deductions using the 4th quarter estimated state income tax payment, my most flexible federal income tax deduction, as described in Texas Proud's post. I can put two 4th quarter estimated state income tax payments into the same calendar year to increase the itemized deduction while taking none of them in the alternating years. In those off-years, I end up being able to take the standard deduction, in effect bumping up my reduced itemized deduction.


As for the OP's idea, I'm not sure I would intentionally overpay by such a large margin. But you could probably get away with overpaying by a few thousand dollars and remain under the tax radars.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is offline   Reply With Quote
Old 04-21-2017, 06:45 PM   #4
Dryer sheet wannabe
 
Join Date: Sep 2012
Location: Clayton
Posts: 13
So if you are MFJ and around 80k or less you could do this I would think since it is below the AMT exemption. So 40k each year.
borrom2002 is offline   Reply With Quote
Old 04-21-2017, 07:59 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 15,302
Quote:
Originally Posted by scrabbler1 View Post
Over the last few years, I have toyed with the idea of bunching my itemized deductions using the 4th quarter estimated state income tax payment, my most flexible federal income tax deduction, as described in Texas Proud's post. I can put two 4th quarter estimated state income tax payments into the same calendar year to increase the itemized deduction while taking none of them in the alternating years. In those off-years, I end up being able to take the standard deduction, in effect bumping up my reduced itemized deduction.


As for the OP's idea, I'm not sure I would intentionally overpay by such a large margin. But you could probably get away with overpaying by a few thousand dollars and remain under the tax radars.
I was also bunching my deductions every 2nd year... until I RE and now do not owe any federal taxes

But, stupid me I still doubled up not thinking about that it did not help...
Texas Proud is offline   Reply With Quote
Old 04-21-2017, 09:32 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 3,811
I guess you'll need to put in your own situation to see. I stuck just the wages in Taxcaster 100K w/ 50K state w/h and then 50K state tax refund for the next yr VS 100K income and std deduction.

For the latter (normal) situation, tax is 11.4K. For OP's scheme tax 5.4K 1st yr
3.5K 2nd yr for total of 8.9K for difference of 2.5K. No AMT showed up .
Possibly not the whole amount of refund is taxable which would make things even more favorable.

The comments about IRS radar are an interesting caution .

From a TT forum: https://ttlc.intuit.com/questions/34...answer_5572870
"Also, if you pre-pay a large amount of money in advance that you don't actually owe yet, for the purpose of avoiding federal income tax due to your projected drop in income, the IRS could likely see it as an illegal tax avoidance strategy. Paying tax you owe is deductible. Paying money that you don't owe, so that the state will hide it from the IRS for you, not so much."
kaneohe is offline   Reply With Quote
Old 04-21-2017, 10:25 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 21,767
I would not loan the state of IL $50K.

-ERD50
ERD50 is offline   Reply With Quote
Old 04-22-2017, 12:07 AM   #8
Recycles dryer sheets
evilanne's Avatar
 
Join Date: Feb 2017
Location: San Antonio
Posts: 174
I prefer living in States without an income tax, but Texas makes up for it with the property taxes. I am thinking about the possibility of itemizing every other year to maximize by paying the property taxes in January & December. Since my mother had enough medical expenses to itemize this year, I had her pay her property taxes early in December, which she normally pays in January, that increased her itemized deductions. 2017 will be the first year that my income is substantially reduced but it depends on what other deductible expenses I incur and which ones I can delay, like the property tax. Without the property taxes, I think my deductions will be close to the standard deduction, maybe a bit higher. I need to run the numbers to see what the impact will be Appreciate the OP's post as it made me think of other options that could lower my taxes. I like challenging puzzles to solve.
evilanne is offline   Reply With Quote
Old 04-22-2017, 07:45 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 15,302
Quote:
Originally Posted by evilanne View Post
I prefer living in States without an income tax, but Texas makes up for it with the property taxes. I am thinking about the possibility of itemizing every other year to maximize by paying the property taxes in January & December. Since my mother had enough medical expenses to itemize this year, I had her pay her property taxes early in December, which she normally pays in January, that increased her itemized deductions. 2017 will be the first year that my income is substantially reduced but it depends on what other deductible expenses I incur and which ones I can delay, like the property tax. Without the property taxes, I think my deductions will be close to the standard deduction, maybe a bit higher. I need to run the numbers to see what the impact will be Appreciate the OP's post as it made me think of other options that could lower my taxes. I like challenging puzzles to solve.

There are other deductions you can push into your deduction year... charitable donations for one... who says you have to give the same amount each year Also, I ask (but do not get it all the time) for my DWs church to give me her bill early so I can put 2 in one year...


If income is not large and you have elective medical, do it all in one year... might get a medical deduction...
Texas Proud is offline   Reply With Quote
Old 04-22-2017, 08:09 AM   #10
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Location: Milford
Posts: 12,291
Quote:
Originally Posted by Texas Proud View Post
There are other deductions you can push into your deduction year... charitable donations for one... who says you have to give the same amount each year Also, I ask (but do not get it all the time) for my DWs church to give me her bill early so I can put 2 in one year...
I don't think a bill is necessary to generate the tax deduction. The key fact is the date when you hand over the check. In my church, we submit our pledges for the next year in November. If I were lumping deductions and this year was my lump year, I would simply pre-pay my pledge amount for 2018 before the end of December this year.

Actually, you could get three in one year if you do this:

1. In 2016, having pledged $xx.xx, don't put it in the plate weekly. Instead, pay it as a lump sum on January 2, 2017.

2. Pledge $xx.xx for 2017 and drop the appropriate fraction in the plate weekly.

3. Pledge $xx.xx for 2018 and pay it as a lump sum on December 30, 2017. Do not put anything in the plate during 2018.

4. Repeat the cycle starting in 2019.


That way, you use the standard deduction in 2016 and 2018, but itemize with a triple charitable contribution in 2017.
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 04-22-2017, 02:15 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 15,302
Quote:
Originally Posted by Gumby View Post
I don't think a bill is necessary to generate the tax deduction. The key fact is the date when you hand over the check. In my church, we submit our pledges for the next year in November. If I were lumping deductions and this year was my lump year, I would simply pre-pay my pledge amount for 2018 before the end of December this year.

Actually, you could get three in one year if you do this:

1. In 2016, having pledged $xx.xx, don't put it in the plate weekly. Instead, pay it as a lump sum on January 2, 2017.

2. Pledge $xx.xx for 2017 and drop the appropriate fraction in the plate weekly.

3. Pledge $xx.xx for 2018 and pay it as a lump sum on December 30, 2017. Do not put anything in the plate during 2018.

4. Repeat the cycle starting in 2019.


That way, you use the standard deduction in 2016 and 2018, but itemize with a triple charitable contribution in 2017.

Ours is not a pledge... it is a fee imposed by the church.... if I just give them money they think it is extra contribution....
Texas Proud is offline   Reply With Quote
Old 04-22-2017, 02:30 PM   #12
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Location: Milford
Posts: 12,291
Quote:
Originally Posted by Texas Proud View Post
Ours is not a pledge... it is a fee imposed by the church.... if I just give them money they think it is extra contribution....
I've learned something new.
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 04-22-2017, 06:00 PM   #13
Thinks s/he gets paid by the post
DrRoy's Avatar
 
Join Date: Dec 2015
Location: Michigan
Posts: 2,770
Quote:
I would not loan the state of IL $50K.
Yea. Check out their credit rating.
__________________
"The mountains are calling, and I must go." John Muir
DrRoy is offline   Reply With Quote
Old 04-22-2017, 06:11 PM   #14
Recycles dryer sheets
 
Join Date: Nov 2016
Posts: 86
Quote:
Originally Posted by evilanne View Post
I prefer living in States without an income tax, but Texas makes up for it with the property taxes. I am thinking about the possibility of itemizing every other year to maximize by paying the property taxes in January & December. Since my mother had enough medical expenses to itemize this year, I had her pay her property taxes early in December, which she normally pays in January, that increased her itemized deductions. 2017 will be the first year that my income is substantially reduced but it depends on what other deductible expenses I incur and which ones I can delay, like the property tax. Without the property taxes, I think my deductions will be close to the standard deduction, maybe a bit higher. I need to run the numbers to see what the impact will be Appreciate the OP's post as it made me think of other options that could lower my taxes. I like challenging puzzles to solve.

I've been paying my property taxes in the "even" years for a while now. I have no mortgage, and it reduces my taxable income by 3K (and growing ) every two years--like getting a bi-annual bonus.

It helps not to have a mortgage, so I don't have to convince them to escrow it for me and pay at their timing...
respond2u is offline   Reply With Quote
Old 04-22-2017, 06:52 PM   #15
Recycles dryer sheets
 
Join Date: May 2011
Posts: 314
Quote:
Originally Posted by Texas Proud View Post
Ours is not a pledge... it is a fee imposed by the church.... if I just give them money they think it is extra contribution....
Is anything of value received for these fees, such as meals?
sanfanciscotreat is offline   Reply With Quote
Old 04-22-2017, 07:19 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 15,302
Quote:
Originally Posted by sanfanciscotreat View Post
Is anything of value received for these fees, such as meals?

Well, it is not a lot of money, like $250 ish... they do have meals, but usually that is brought by the people to share... I think this is mostly to make sure they have a certain amount of money each year to pay the bills and the pastor... it is a small church...


From what I have heard from my old boss who is Jewish, and maybe someone can chime in on this, is that he also gets a bill but it is based on his income... IOW, if you make a bunch your bill is high....
Texas Proud is offline   Reply With Quote
Old 04-23-2017, 08:27 AM   #17
Full time employment: Posting here.
 
Join Date: Mar 2011
Location: Dallas
Posts: 530
We're in TX too and this is the first year we'll get over the standard by doubling up on property tax. To get any benefit from there, we'll need to "transfer" additional contributions as 2 years of taxes will likely be exactly $13k.

We don't have any other deductions and haven't itemized in 10+ years...on a side note our congregation doesn't set an amount to give. There's a box in the back for people to give privately. We also are all volunteers with no paid pastor...we all work for a living and contribute (with a little time) to the upkeep of the place. More than one way to contribute...
Surewhitey is offline   Reply With Quote
Old 04-23-2017, 07:21 PM   #18
Dryer sheet wannabe
 
Join Date: Mar 2017
Location: Fort Mill
Posts: 22
The OP's idea had occurred to me recently. It has some merit, but it would cause a lot of hand wringing waiting to get that cash back from the state without delays or issues. No idea if it could be construed as an illegal tax avoidance strategy. I think better tax deferment strategies exist.
Retireatee1 is offline   Reply With Quote
Old 04-24-2017, 06:22 AM   #19
Recycles dryer sheets
 
Join Date: Feb 2015
Posts: 229
Quote:
Originally Posted by borrom2002 View Post
I have always been thinking of weird ways to reduce taxes. The last few years I have had small state refunds and it got me to thinking.

You are allowed to reduce your fed taxable by the amount you had withheld for state taxes if you itemize. But if that causes you to get a refund from the state it is counted as income the next year.

So here is the idea. If this is your last year of work before retirement and you want to save on taxes try this.

My work lets me add an extra amount to be withheld from my check for taxes if I want. What if I made 100k that year and had them withhold 50K for state taxes. Now my taxable income would be reduced by 50k so I would be in a lower bracket that year. Then the following year you are retired and have no income but will get a state refund for the 50K and be in the low bracket again. This assumes you could live of the 50k each year.

So what do you think? I have not seen it discussed before. Have I invented a new way for people to reduce their taxes on the way out of their job?
I am pretty sure this will not work.

Form 1040 ....Line 10.... Income Section.... "taxable refund of state and local income taxes."
There is a worksheet that goes along with figuring the tax, but in past years any refund I have received from my state has been fully taxable. The IRS considers a state tax refund as income and it is reportable ( as per the worksheet) on Line 10. This is true if you itemized deductions the previous year.
MrLoco is offline   Reply With Quote
Old 04-24-2017, 07:52 AM   #20
Recycles dryer sheets
evilanne's Avatar
 
Join Date: Feb 2017
Location: San Antonio
Posts: 174
MrLoco is right, see https://ttlc.intuit.com/questions/18...-is-it-taxable
__________________

evilanne is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Interesting idea to beat crazy health care premiums EastWest Gal FIRE and Money 130 03-17-2017 12:42 PM
Is this a crazy idea? The Rodent FIRE and Money 38 10-12-2016 10:12 AM
Am I crazy, or is this 'Financial Advisor' crazy? Coderguy Young Dreamers 26 06-08-2011 08:02 PM
Retire at 45? Crazy or Just Maybe Possible? KimInWis Young Dreamers 17 01-02-2007 03:07 PM
Crazy friend has talked me into his latest idea laurence Other topics 21 01-08-2006 06:23 PM

» Quick Links

 
All times are GMT -6. The time now is 01:50 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2019, vBulletin Solutions, Inc.
×