On Nov 14, 2:17�pm, "jack" <j...[at]yahoo.org> wrote:
- quote -

Jack:

Point 1: That is correct but ff a state income tax overpayment caused
you to transition from paying the regular tax to paying the AMT, then
a portion of the refund would be taxable. The portion of the refund
that would be taxable is the portion of the overpayment that reduced
the regular tax to the point that it equaled the AMT.

Point 2: If a state income tax overpayment, for example, causes more
of a taxpayer's capital gains to taxed at the lower long-term capital
gains rate and fewer of the gains to be taxed at the higher rate then
there can be a tax benefit. See page 2 of Form 6251. See
instructions in IRS Publication 525 to determine if there was a
benefit. You will have to figure out the portion of the overpayment
that produced the benefit. As I indicated above, if you are similarly
situated in the refund year, i.e. paying the AMT with regular taxable
income excluding capital gains below the 25% tax rate threshold then
IRS instructions will "more or less" work out to produce a "zero sum
game". However, if you pay the regular tax in the refund year, IRS
instructions will have you paying the regular tax on the refund ov the
overpayment that produced the limited long-term capital gains rate tax
benefit after paying the AMT on the income used for the overpayment.
This of course violates section 111(a) of the IRC.

Cheers,

WDK
- quote -

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On Nov 14, 11:17 am, "jack" <j...[at]yahoo.org> wrote:

- quote -

This is correct. To rephrase, if you were in AMT in 2008 then you
didn't get a benefit from the state income tax deduction, so then the
following year the state income tax refund is not taxable. There's a
worksheet in the instructions for 1040 about how to calculate the
taxable part of the refund (maybe part of it is taxable). I'm
thinking if you're in the 33% tax bracket, then the state income tax
deduction might give you a break of 33%, but AMT adds 28%, so the
benefit is then really 5% -- but I'm not sure if it works that way.
I've not yet tried to do that worksheet yet.

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<removeps-groups[at]yahoo.com> wrote in message
news:be9acfad-19c7-4d2f-8fe3-c8bfb32051f2[at]d10g2000pra.googlegroups.com...
- quote -

payment. I know there was no reason to do that, but that way I can't
forget.

I made the assumption (possibly incorrect) that if state income tax isn't
deductable under AMT, then a state tax refund wouldn't be taxable. No?

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

On Nov 14, 2:18*am, "jack" <j...[at]yahoo.org> wrote:
- quote -

Jack:

- quote -

overpayments that provided a tax benefit in a prior year when the
regular tax was paid. As a consequence neither the income used for the
overpayment nor the refund with be taxed directly. Based on IRS SOI
data it appears that the instruction on Line 7 of Form 6251 caused a
loss to the Treasury in excess on $500,000,000 in 2005. The
instruction has been in place since 1988.

I addressed this illicit "windfall" at the "Closing the Tax Gap"
symposium at Stanford University last Saturday (November 8). Present
at this symposium was the National Taxpayer Advocate, Nina Olson and
Assistant US Attorney, Tax Division, Nathan Hockman and a substantial
number of leading tax law professors from across the country. No one
tried to talk me down.

There is just a little problem with that instructionon Line 7 of Form
6251. It is not consistent with the section 56(b)(1)(D) of the
Internal Revenue Code. Section 56(b)(1)(D) is necessary to exclude
from AMTI refunds of tax overpayments that in some cases provided a
tax benefit in the prior year when the AMT was paid as a result of the
two-tier capital gains rate scheme. A tax overpayment can result in
more of the capital gains (and qualified dividends) being taxed at the
lower rate (0% for 2008) and fewer of the gains being taxed at the
higher rate.(15% in 2008). Without section 56(b)(1)(D), both the
income and the refund related to a tax overpayment that provided the
limited long-term capital gains rate tax benefit would be taxed at the
AMT rate if the AMT is paid in both years.

Here is a question that should help illuminate the problem with IRS’s
current instruction Line 7 on Form 6251) related to section 56(b)(1)
(D).

How would the instruction for line 7 on Form 6251 (2007) change if
section 56(b)(1)(D) of the Internal Revenue Code was amended to read
as follows?

(D) Treatment of certain recoveries
No recovery of any tax to which paragraphs (1), (2), or (3) of section
164(a) applied shall be included in gross income for purposes of
determining alternative minimum taxable income.
Subparagraph (D) shall not apply to the recovery of a tax allowable in
computing adjusted gross income.

Here are the relevant parts of section 56(b)(1)(D) of the Internal
Revenue Code as currently written.

Sec. 56. Adjustments in computing alternative minimum taxable income

b) Adjustments applicable to individuals

In determining the amount of the alternative minimum taxable income
of any taxpayer (other than a corporation), the following treatment
shall apply (in lieu of the treatment applicable for purposes of
computing the regular tax):
(1) Limitation on deductions
(A) In general
No deduction shall be allowed -
(ii) for any taxes described in paragraph (1),
(2), or (3) of section 164(a). Clause (ii) shall not apply to any
amount allowable in computing adjusted gross
income.

(D) Treatment of certain recoveries
No recovery of any tax to which subparagraph (A)(ii)
applied shall be included in gross income for purposes of
determining alternative minimum taxable income.

If Congress also intended for the refund of a tax overpayment that
provided a "full" tax benefit when the regular tax was paid to be
excluded from AMTI then it seems to me that only the “amended” version
of section 56(b)(1) would produce those results. But Congress
preserved the “tax benefit rule” by limiting the exclusion on Line 7
of Form 6251 to refunds of tax overpayments to which subparagraph (A)
(ii) applied, i.e., in years the AMT was paid. Thus a limited long-
term capital gains rate based tax t benefit that was provided by a tax
overpayment in the year that the AMT was paid could be offset by
inclusion of the refund in the determination of the capital gains
portion of the AMT in the refund year.

A letter that IRS wrote to me in 1996 concerning the exclusion of
"all" tax refunds from AMTI was published in Tax Analysts in 1999.
Since the two-tier capital gains rate scheme was not part of the IRC
until 1997, it was not addressed in the letter. The two- tier captal
gains rate scheme and the limited long-term capital gains rate based
tax benefit that can result from it utterly destroyed the argument set
forth by the attorney in the IRS Office of Chief Counsel in attempting
to justify the "windfall".

It should be noted that if there is a limited long-term capital gains
rate based tax benefit from a tax overpayment in a year the AMT is
paid and the taxpayer pays the regular tax in the refund year the
income/refund related to the tax ovepayment will be DOUBLE TAXED".
That instruction violates section 111(a) of the Internal Revenue Code.

IRS instruction require that you include all taxes paid/ withheld in
the year as deductions. See Form 1040 Instructions for Schedule A.
To comply with the IRC, you will need to put a zero on Line 7 of Form
6251 for 2009 (aasuming the Form has not be corrected or modified.)

Cheers,

WDK

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

On Nov 13, 11:18 pm, "jack" <j...[at]yahoo.org> wrote:

- quote -

I'm not sure if the IRS will re-characterize your state tax paid. If
you're making equal estimated payments of $11,250 each, maybe you can
skip the Jan/15/2009 payment.

Anyway, back to the basics. The rule is that if you get a tax
deduction from state tax deduction, then any refund the following year
is taxable (on page 1 of form 1040). So you should get the full 50k
deduction for your 2008 return, but an additional 20k of tax on your
2009 return. So be sure to make estimated payments in 2009 to cover
this.

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

I know the IRS will deny deductions for excessive state taxes paid just to
get a deduction.
But what happens if I pay $50,000 in estimated state taxes in 2008, but it
turns out that my state tax bill is only $30,000. The $50,000 was a good
guess of what my tax bill would have been if the market had gone up its
normal 10%, but it obviously didn't, so my estimate was off.

One added fact... I will be in AMT in 2009 but not in 2008. So it
admittedly is a very convenient error, but one made honestly.

I am guessing the honesty of the error is unimportant; I only get to deduct
the $30,000.

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >