Stuart A. Bronstein wrote:
- quote -

Seems like a stretch to me to call it "offsetting
positions." However, that is another way the IRS might
attack it.

I think someone else pointed out that, ironically,
California law actually REQUIRES some individual taxpayers
to grossly overpay their state taxes. Purchasers of
California real property are required to withhold 3-1/3
percent of the sale price and pay it over to the state. This
is often a great deal more than the actual tax liability of
the seller relating to the sale. The seller gets the refund
the following year when the return is filed.

Beginning in 2007, individual sellers can elect to have the
buyer withhold 9.3 percent of the gain (the highest
individual income tax rate) rather than 3-1/3 percent of the
gross. =20

Katie in San Diego

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Stuart A. Bronstein wrote:
- quote -

Seems like a stretch to me to call it "offsetting
positions." However, that is another way the IRS might
attack it.

I think someone else pointed out that, ironically,
California law actually REQUIRES some individual taxpayers
to grossly overpay their state taxes. Purchasers of
California real property are required to withhold 3-1/3
percent of the sale price and pay it over to the state. This
is often a great deal more than the actual tax liability of
the seller relating to the sale. The seller gets the refund
the following year when the return is filed.

Beginning in 2007, individual sellers can elect to have the
buyer withhold 9.3 percent of the gain (the highest
individual income tax rate) rather than 3-1/3 percent of the
gross. =20

Katie in San Diego

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

I wouldn't be so sure about that. It looks an awful lot like
a §1092 straddle to me.

Stu

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"FredK" <fred.knotts[at]gmail.com> wrote:

- quote -

Hard to believe the $5,000 isn't taxable for 1040 purposes.
If he itemized for 2006, that's what's used on the
worksheet, not 2007. Your co worker could spend his time
selling the idea if it would work.

Jeff Berk
Jenkintown, PA

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FredK wrote:

- quote -

Well, I think you can poke some holes in it if you put some
numbers into the state & local income tax refund worksheet.
The refund will be taxable income in 2007 to the extent his
total 2006 itemized deductions (including the extra $5,000
in state income tax), as limited by his 2006 AGI, exceed the
2006 standard deduction. (So plug in $5,150, etc. in place
of $5,000, etc. on Line 3 of the worksheet.)

In other words, the refund will be taxable income in 2007 to
the extent he gets a tax benefit from the deduction in 2006.

It's still a deferral, of course.

The deduction may be disallowed by the IRS to the extent
that it does not reflect a reasonable estimate of the state
tax due on his 2006 return. See, e.g., PLR 8222009,
2/26/1982.

Katie in San Diego

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Your friend has it figured incorrectly. To use the examples
of the 2005 tax year Form 1040, to the extent that his
itemized deductions exceeded $5,000 (assuming he's single,
and not head of household), the portion of his state income
tax refund that is taxable in 2006 for federal income tax
purposes is the lesser of (a) his actual tax refund, or (b)
the excess of his itemized deductions over $5,000. Since
he'd have made state income tax payments in excess of
$5,000, and since he itemized, his allowable itemized
deductions from line 28 of Schedule A (2005 Form 1040) would
have been at least $5,000. Thus, he would have had to
answer "YES" to the question on line 6 of the worksheet.

For example, assume that he paid california taxes of $6,000,
plus the additional $5,000 at year-end. Also assume that he
had other allowable itemized deductions of $2,050, for total
allowable miscellaneous deductions of $13,050 for 2005. In
2006 he would receive a check from California for $5,000
along with a Form 1099-G (a copy of which goes to the IRS).

Going through the worksheet, and assuming that he is single,
not blind or over 65, he would have the following entries:

Line 1: $5,000
Line 2: $13,050
Line 3: $5,000
Line 4: "NO," -0-
Line 5: $5,000 + $0 = $5,000
Line 6: "YES," $8,050 ($5,000 is less than $13,050 and
line 2 minus line 5 = $13,050 - $5,000 = $8,050)
Line 7: $5,000 (smaller of line 1 or line 6 - $5,000 is
smaller than $8,050)

Thus, the TAXABLE PART of your friend's refund would be
$5,000. In other words, the entire amount of the excess
that he paid over to California in December.

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FredK wrote:

- quote -

Look at the TIP in the instructions:

"None of your refund is taxable if, in the year you paid the
tax, you either (a) did not itemize deductions, or (b)
elected to deduct state and local general sales taxes
instead of state and local income taxes."

He DID itemize deductions in the year he paid the tax, so it
is taxable.

I guess that it's possible, if you know that your income the
next year will be much lower, to overpay your state tax to
increase the deduction, then pay tax on the refund the next
year at a lower rate. I'd be surprised if the IRS doesn't
have some sort of limitation on this sort of income
shifting.

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"FredK" <fred.kno...[at]gmail.com> wrote:

- quote -

No, this won't work. He will get a 2007 1099G from
California documenting his refund, which will have to be
added back to his income on his Federal tax return because
he itemized in 2006. So he will pay federal tax for it on
his 2007 return. But CA doesn't tax refunds, so it will be
subtracted from his CA return. But CA also doesn't allow
state tax paid as an itemized deduction, so when he filed
his 2006 return, he had to subtract the $5,000 from his
itemized deductions in the first place. So all he has done
is delay paying tax on the $5,000 from the 2006 return to
the 2007 return.

Dennis

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"FredK" <fred.knotts[at]gmail.com> wrote:

- quote -

He's completing the worksheet incorrectly. To the extent the
excess $5000 payment reduces his 2006 taxes, the refund
becomes taxable in 2007. State income tax refunds are not
taxable when you did NOT itemize the previous year.

Ira Smilovitz

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FredK wrote:

- quote -

Oh, it's taxable alright. The 1040 instructions are not
being understood correctly. Since he itemized in 2006 (the
year he paid the state tax) and got a tax benefit, the
refund will be taxable in 2007 (whether or not he itemizes
in 2007 is irrelevant).

There are some detailed rules regarding the difference
between what he could have deducted and what he actually did
deduct, but in the end, rest assured this loophole has been
thoroughly closed.

There can be some net benefit if he knows that his marginal
tax rate will drop next year, since the deduction this year
could offset, say, 25% tax-rate income while the refund
might be taxable the following year at only 15%. But I've
also heard that CA tax authority sniffs this out and might
question the unjustified overpayment.

Ironically, until recent changes, when selling
non-residential real estate, the CA taxing authority forced
this situation themselves, by requiring withholding on the
sale that typically would far exceed the actual tax due.

-Mark Bole

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FredK <fred.knotts[at]gmail.com> wrote:

- quote -

He'll lose the audit when they challenge the overpayment.

Seth

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FredK wrote:

- quote -

This where his "plan" falls apart. The refund, to the extent
that he got a tax benefit from it the previous year IS
taxable in the year of the refund. Tell him to read the
instructions again.

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FredK <fred.knotts[at]gmail.com> wrote:

- quote -

I think he needs to re-read the instructions.

The instructions are applying the tax benefit rule, and
since he received the benefit from itemizing his 2006
deductions, the refund of his 2006 state tax will be
taxable.

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

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"FredK" <fred.knotts[at]gmail.com> wrote:

- quote -

I'm not a tax pro, but I think the wheels come off the wagon
at this step. Your friend should check his math.

--
Vic Roberts
Replace xxx with vdr in e-mail address.

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"FredK" <fred.knotts[at]gmail.com> wrote:

<snip cow-orker's cunning plan
- quote -

He's making a mistake on the worksheet.

--
D.F. Manno | dfmanno[at]mail.com
Now this is not the end. It is not even the beginning of the
end. But it is, perhaps, the end of the beginning. * Winston
Churchill

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- quote -

How does that worksheet lead him, or you, to conclude that
the refund is not taxable? The refund would be taxable. He
is probably doing something wrong on the worksheet. In 2008,
when he files for 2007, the worksheet will refer to his 2006
tax return, not his 2007 tax return, just as it now refers
to 2005 when you are filing for 2006. The worksheet is based
on the year you took the deduction, not the year you got the
refund. Is that the misunderstanding?

Bob Sandler

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- quote -

He has misinterpreted the intent & purpose of the
instructions.

He will get a bill some time before 4/15/2011 interest &
penalty on top of the income taxes due on the under reported
SITR (State Income Tax Refund)

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My co-worker (no, not me!) is convinced this will work. He
is single, makes about $70-$80K, and lives in California and
will itemize deductions in 2006 but not 2007. Oh, and he's
annoying and keeps talking about this brilliant plan so I
don't want this to work out for him:

1. This month (Dec 2006), send in a $5,000 extra for state
taxes using California's 540-ES estimated tax form.

2. File CA state 2006 taxes as soon as possible in 2007 to
get the $5,000 overpayment back by, say, March.

3. File federal 2006 taxes in April 2007, itemizing
deductions, including that $5,000 overpayment.

4. In 2008, when it comes to file 2007 taxes, the $5,000 CA
state tax refund he'll get back in March 2007 is apparently
not taxable, at least according to the "State and Local
Income Tax Refund Worksheet-Line 10" on page 24 on the 2006
1040 instructions.

Net result: He has loaned the state of California $5,000
interest-free for about 3 months, losing a little in
interest (5% x 3/12 x $5000 = $62.50), but gaining $1,400
(28% x $5,000) in reduced federal taxes.

How can an overpayment not be taxable the next year,
especially if it is used just to result in reducing federal
taxes the previous year?? This doesn't smell right but I
can't poke a hole in it.

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