Is This Tax Idea Crazy/Possible?

[borrom2002]

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?

 

[Texas Proud]

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.

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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.


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https://www.thebalance.com/state-income-tax-deduction-3192840








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

 

[scrabbler1]

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.

 

[borrom2002]

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.

 

[Texas Proud]

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...

 

[kaneohe]

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/3...income-tax#collapsable_comment_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."

 

[ERD50]

I would not loan the state of IL $50K.

-ERD50

 

[evilanne]

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.

 

[Texas Proud]

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...

 

[Gumby]

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.

 

[Texas Proud]

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....

 

[Gumby]

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.

 

[DrRoy]

I would not loan the state of IL $50K.

Yea. Check out their credit rating.

 

[respond2u]

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...

 

[sanfanciscotreat]

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?

 

[Texas Proud]

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....

 

[Surewhitey]

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...

 

[Retireatee1]

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.

 

[MrLoco]

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.

 

[evilanne]

MrLoco is right, see https://ttlc.intuit.com/questions/1...or-local-refund-i-got-last-year-is-it-taxable

 

[evilanne]

If income is not large and you have elective medical, do it all in one year... might get a medical deduction...

Actually, I was able to take medical deduction for 2016 due to dental work and the fact that pension pays medical insurance premiums with after tax dollars (when working it was paid with pretax dollars). Medical costs over 10% of income is deductible (7.5% if 65 or older, include medicare supplemental insurances) if you are able to itemize.

 

[borrom2002]

MrLoco. In the scenario I intend to pay taxes on the state tax refund money the next year. The idea is 2 years of 50k income is paid in a lower tax bracket then 1 year of 100k income. It is not like I am trying to get 50k tax free just break it out over 2 years.

 

[scrabbler1]

Borrom2002, keep in mind that there are other moving parts which will offset your tax savings. When I wrote about bunching my itemized expenses into one year so I could take the standard deduction in the other year, in one scenario I had offsets to the tax savings of doing this. One was the reduction of my ACA premium subsidy because my MAGI was higher in the year I had to include an unrelated state property tax refund when I itemized the full deduction in the other year. Another was a reduction in my itemized medical expense deduction because the 10% AGI exclusion rose slightly. That had a ripple effect through the worksheet for determining the tax on qualified dividends and LT cap gains.


These two offsets occurred when not bunching my itemized deductions resulted in taking the standard deduction in both years; bunching had me itemizing in one year. If not bunching my itemized deductions resulted in itemizing my deductions in both years; bunching had me itemizing in one year - then the aforementioned issue helps me out because I am adding back the state property tax refund only once in 2 years, not twice.

 

[JoeWras]

Regarding lumping charitable donations: a good way to do this is to use a Donor Advised Fund. You could lump in years and distribute non-lumped.

Be advised that the IRS knows a bit about lumping charitable contributions, so they have certain limits and phase outs. Do your homework.

I have a hard time believing you'd pass an audit for such a severe state income overpayment. Depends on your risk tolerance for audits.

 

[gerntz]

Been bunching deductions for a few years after I realized donations were partly going to filling up the standard deduction bracket & thus weren't being a deduction.