It's Fall: 10 Weeks Of Alternative Minimum Tax Planning Ideas...week 1 State Income Taxes
For Regular Tax purposes - that is, if you are not in the Alternative Minimum Tax - you are allowed a deduction for state income taxes that you pay
. Under the AMT, however, you are allowed no deduction for state income taxes. This problem affects 94 percent of all folks stuck in the Alternative Minimum Tax, so it is something that you definitely need to look at. This also represents one of the best AMT planning opportunities.
Every state with an income tax requires that you pay the tax throughout the year. You can do this either through withholding from your paycheck if you are an employee, or through quarterly estimated payments if you are self-employed, retired, or have not adjusted your withholding to cover the taxes you'll owe on your investment income.
Two key points:
1 - No state requires you to pay in 100% of your state tax liability - the required percentage generally is 80% or 90%. If you don't pay in this required amount you may be subject to an underpayment penalty, which usually is calculated in a manner similar to interest.
2 - If you make quarterly estimated tax payments, the fourth quarter payment is generally due on January 15 - for example, January 15, 2010 for the fourth quarter installment of your 2009 taxes. This is the way the IRS works, and most states follow this pattern.
How to do this simple tax planning:
The AMT-saving strategy here is to focus on the control you have over the payment of this last amount - the fourth quarter installment, if applicable, and/or the last 10 or 20 percent you will owe. Assuming you have a choice of paying a portion of your state income taxes in December or in January, the simple act of when you write out the check will have a direct impact on the AMT youll pay. As mentioned above, you get no benefit from a state income tax deduction in a year you are in the AMT. By getting more of your state income taxes paid in a year you are not in the AMT, you will achieve real tax savings.
Example:
Assume that you are in the AMT in 2009, your total 2009 state taxes are $15,000, you will not be in the AMT in 2010, and your Regular Tax bracket is 35%. If you could defer paying $1,500 of your 2009 state income tax until January, this would save you over $500. If you could defer $3,000, your savings would be over $1,000. Note that even if you end in the AMT again next year, continuing to execute this strategy will mean that you will achieve this Regular Tax benefit in the first year that you are not in the AMT.
If you are certain that you will not be in the AMT next year, consideration might be given to delaying payment of more than the allowable percentage, even if it means incurring an underpayment penalty. Many states have underpayment rates around 6%; this small penalty obviously is less than a Federal tax savings of up to 35%.
What you'll need:
If you do decide to pursue a state income tax strategy, you'll first need to check the rules for making estimated payments for the state in which you live. All states have the forms you'll need, available on their web sites. The three key forms are the state equivalent of the following IRS forms:
Form W-4, Employee's Withholding Allowance Certificate - This can be filed at any time with your employer to adjust your withholding up or down.
Form 1040-ES, Estimated Tax for Individuals - This is used to make quarterly estimated tax payments if you are self-employed or retired, or if you have not adjusted your withholding for the additional taxes due on your investment income.
Form 2210, Underpayment of Estimated Tax by Individuals - This is used to determine whether you have paid in the required percentage. By reading the instructions you will see what your state's required minimum pay-in percentage is.
Conclusion:
State income taxes affect nearly everyone and are one of the best AMT tax planning opportunities. Applying what you learned above will provide a cash and tax benefit. You control this one and can do it without the need of a professional adviser.
If you want additional assistance and links to your States forms, plus a dual tax calculator to determine the exact benefit.
by: George Bauernfeind
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It's Fall: 10 Weeks Of Alternative Minimum Tax Planning Ideas...week 1 State Income Taxes