Smoothing year to year income taxes


D

dumbstruck

On years with lumps of income I used to smooth it out federally by paying state income tax prepayment due Jan 15 earlier at Dec 30 and increasing it. Maybe just moving it helps, due to it vanishing from that years deductions and appearing in the year that you most need deductions. Helps for instance when a large long-held mutual fund gets liquidated.

This accidentally happened to me in the split-and-delay Roth conversion tax program that you all recommended against. On hindsight, I should have Rothified half, skipped a year to smooth income, then done (and smoothed) the other half. But next year I face terrible pitfalls unless jacking up that prepayment insanely.

What happened was when the Roth conversion happened, the feds of course let me skip a year but the state did not. This gave a brutal state income tax which suggested brutal estimated payments for the next year (to avoid the penalty possibility). The second year where feds include half of the Roth treated as income, it is somewhat painless due to the huge deductible state prepayments. But the third year the state refund (even if rolled over, and more estimated payments made) will accumulate with the half-roth to jack up the federal income to absurd levels.

So bottom line this enticing delay-and-split Roth program was a disaster and pushed the whole lump into the first year for the state and into the third year for the feds. With a lack of deductions, the only way to make it more "fair" seems to double my already triple state prepayments this December!
 
Ad

Advertisements

B

Bill Brown

Well, I haven't visited this group in years so I don't know the
history of posts you refer to.

However, by December you should have a pretty good idea of what your
state tax liability for 2012 will actually be. In your position, I
would prepay only enough to hit that amount (plus maybe a little bit
to reduce the chance of bad surprises).

Doesn't your state require that estimated payments be equal throughout
the year to avoid underestimated penalties?

Good luck.


======================================= MODERATOR'S COMMENT:
Thanks for coming back to the newsgroup. Please try to leave in place some of the message to which you are responding, for context. Thanks.
 
Ad

Advertisements

D

dumbstruck

However, by December you should have a pretty good idea of what your
state tax liability for 2012 will actually be. In your position, I
would prepay only enough to hit that amount (plus maybe a little bit
to reduce the chance of bad surprises).
Thanks, but my clumsy trick is to wildly overpay my December state estimated to create a significant federal deduction. This fed deduction is needed to smooth out roth conversion income which pushes me to higher federal tax rates.

However, I did the one-time deal where my roth conversion is split into 2 conseq years. So now if I do that trick the second time, I believe it will be cancelled out by the state returning the first excess as a refund this year. So I have to double this December overpay to have the same effect.

It's so unfair the way the feds treat massively variable income from year to year. I wonder what it takes to get classified in the magic exception category as fisherman or the other boom and bust occupation where they allow year to year smoothing. Or any other technique.
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top