Katie wrote:
- quote -

I don't even think that it comes down to that. It is a
matter of one's chosen ACCOUNTING METHOD. For those on the
cash basis, what one has paid is his/her required
withholding and estimated tax payments - so that is what
gets deducted. For those on the accrual basis, it depends
on what one is liable for and when. Some states, by
statute, indicate that the tax accrues on January 1 (or the
first day of the next tax year for those not on the calendar
year), and other states indicate December 31. The outcome
proposed in the original question is possible ONLY for
accrual basis taxpayers in states that accrue the year's
liability on its last day.

The only state I have heard an answer to about this for
accrual basis taxpayers is California. Back about 1974, CA
changed the date from January 1 to December 31.

- quote -

I disagree. There is no discretion permitted here to choose
- other than to change accounting methods.

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Katie wrote:

(Referring to the strategy of only deducting the income
taxes actually due in year 1, rather than deducting the
income taxes paid and claiming the refund as a recovery.)
....

- quote -

Unless you're subject to AGI phaseouts in year 2, in which
case your year 2 reduction would be larger than your year 1
inmprovement....

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"Katie" <katiej_1958[at]yahoo.com> wrote:

- quote -

I wonder if this is a way for some to accomplish something
the IRS has been fighting for years: income shifting from
one year to the next. I've seen elaborate schemes,
sometimes known as stradles, for that purpose, and most if
not all have been declared illegal. But if someone just
massively overpays their state income tax, will that work?

The downside, of course, is that you are making a year-long,
interest-free loan to the state government. I suppose that
could eliminate much of the benefit of income shifting.

Stu

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Dick Weaver wrote:
- quote -

I think there is some confusion here between what is legal
and what is practical or sensible <G> .

Legally, I would agree with Alan Kalman that the IRS doesn't
care whether you claim all your allowable deductions or not.
Deductions are allowed, not required.

The state income tax refund is taxable income to you in the
next year only if you got a tax benefit from it in the year
you paid it. If you didn't deduct it in Year 1, you don't
have to include the refund in income in Year 2.

Now, of course, you will get a 1099G from the state showing
the amount of the refund, and the IRS will have that
information. So, if you itemized your deductions in Year 1,
the IRS may have some questions to ask you. As long as you
can show that you did not deduct all of the state taxes you
paid in Year 1, so that you did not get a tax benefit from
the amount that was refunded in Year 2, you will win that
argument. However, you will put some time and energy into
defending your position.

Also, this strategy (barring a big difference in rates or
your tax bracket) will increase your Year 1 taxes and reduce
Year 2's by roughly the same amount. That's the reverse of
the usual tax strategy, which is to postpone payment of the
tax as long as possible based on the time value of money.
Shorting the deduction in Year 1 in effect gives the
government the benefit of the time value; it gets the money
sooner.

So I would say the answer to your original question is yes,
you can do that. The question is why you would want to. It
might make sense if you expect to be in a much higher tax
bracket in Year 2 than in Year 1.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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David Woods, EA, ChFC, CLU wrote:
- quote -

Not everyone agrees, below is an earlier post to m.t.m. Is
there detail to support a "NO" answer?

thanks
dick w
----------------

Tax law is written to require that a taxpayer actually pay
the amount of the deduction and keep adequate records to
substantiate the deduction. Some items of deduction also
have other requirements. Mortgage interest requires that
the taxpayer be legally obligated to repay the loan. The
law does not require and the IRS could care less if a
taxpayer chooses not to take all the itemized deductions
they are entitled to. The IRS only cares if you try to take
too much or you can't substantiate what you have spent. If a
taxpayer has a qualified expense of $100 and chooses to only
include $20 as an itemized deduction, that is okay. If the
t/p later receives an insurance recovery or a refund of $80
relating to that $100 qualified expense, there is no income
to declare as that payment does not meet the definition of a
recovery.

--
Alan
Tax resources on the Internet by subject
and category may be found at my home page.
http://pages.prodigy.net/agkal man/

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bono9763[at]yahoo.com wrote:

- quote -

Hey! Great minds think alike.

ChEAr$,
Harlan Lunsford, EA n LA
Mon 7 mar 2005

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Rick Merrill wrote:

- quote -

Which is why today I told a client that if the sales tax
deduction and the deductin for state/local income taxes were
the same, or close enough, the sales tax deduction should
be chosen.

ChEAr$,
Harlan Lunsford, EA n LA
Mon 7 mar 2005

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It won't work because the state will still issue a 1099-G
and the IRS will wonder why you didn't report it on your
2005 Form 1040. Also if you change your state tax deduction,
that will most likely change your state return, as it is
based on your federal return (At least it will in NM. I
think in CA you have to add back in your state tax
deduction, so it depends on where you live.)

You could always take the sales tax deduction instead and
then you wouldn't have to worry about it.

Dennis

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effi wrote:

- quote -

Unfortunately that's not the way the IRS thinks: A state tax
refund is a taxable item on next year's return.

Note that the full "state tax overpaid" will look like
'income' on next year's return even if some or all of the
"state tax overpaid" was left as a pre-payment for next
year's state tax!

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"effi" <effi[at]ev1.net> wrote:

- quote -

No

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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- quote -

No. You have to report the refund in the year you actually
receive it. You will get a 1099-G from the state next year
showing the refund. The IRS will be looking for that income
on your 2005 return, since you are taking an itemized
deduction for state income taxes for 2004.

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"effi" <effi[at]ev1.net> wrote:

- quote -

No.

And why would you want to do this, anyway? Don't you want
the extra money now, so that you can earn interest on it?
If you do what you suggest, the government gets the float.

--
Barry Margolin, barmar[at]alum.mit.edu
Arlington, MA

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if a taxpayer anticipates a refund on a state tax return can
the amount of schedula a deduction for state income taxes
paid be adjusted for the anticipated refund, so no income
has to be reported on the next year federal 1040 for the
refund of state tax?

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