Tax Question-Bunching Deductions?

Any tax experts out there? I am looking into the future and am considering bunching as many deductions for the 2011 tax period as possible. Then in 2012 I will go with the standard deduction. I paid my 2010 real estate taxes after the 1st of January 2011 and will also pay my 2011’s in December 2011. I can also deduct my mortgage interest I pay in 2011. My question is concerning my state income taxes. Currently my employer is deducting state tax every pay period for this year. This will be reported on my 2011 W2. Can anyone tell me if I can prepay estimated state income taxes for all of 2012 in December of 2011 and bunch this in as well? I believe this is how it was explained to me. I would get a form from the state then, that I would give to my employer and then they would not deduct state income tax from my checks in 2012. Anybody doing this?

I have a few clients that I do this for…however, the situation is a little different. My clients that bunch the Itemized Deductions to this extent (with the State Income Taxes) are Qualified Farmers. They don’t need to have income tax withheld nor pay estimates. What happens is they pay their balance due for the previous year by March 1, without penalty. Then, in December we make an estimate, getting 2 years of state taxes in 1 year.

I assume you are an employee. I would have to think about it a little bit, but am thinking this wouldn’t work very well for you (of course I am making some assumptions about your tax situation.) Under most situations, you wouldn’t be able to pay the previous year’s tax in the current year without incurring underpayment penalty. So the only way to get 2 years of tax in 1 year, would be to pre-pay. You really can’t pre-pay income tax in a normal sense. Your pre-payment would end up being an overpayment of current year tax, which would become taxable in the following year, so any benefit over the 2 years would probably be negligible if not detrimental.

The other thing that may come into play is the Alternative Minimum Tax (AMT.) State income taxes are an adjustment to income for AMT purposes (non-deductible.) If you are in a position where AMT effects your return (or even close) any advantage of paying 2 years of tax in 1 year would be diminished or even lost completely.

JD

It is my understanding that the amount of overpayment that you prepaid in estimate would then be noted on the 2011 return to be applied to the 2012 taxes. Thus it would not be payed back as a return and then would not need to be claimed as income on the following years federal taxes. Make sense?

That would make sense. Unfortunately, Congress and the IRS does not. The overpayment could be applied to next year and you wouldn’t actually receive the refund. However, you would have a potentially taxable refund and corresponding state income tax payment for the second year.

Just because you didn’t receive the check doesn’t mean you didn’t get the refund, unfortunately.

JD

Ok. I did some more digging. In Wisconsin, I believe I can prepay an entire year of future income taxes. The following link takes you to the form for prepaying 2011. A new one will come out in early November 2011 for 2012. That is the one I would be using. So I would add the amount of prepay to the amount on my W-2 to the Federal Schedule A line 5a. On my Wisconsin return, for the amount of tax withheld, which is line 43, I would only enter the amount on my W-2. Then in 2012, I would enter the amount of my prepay in the Wisconsin form line 43. Thoughts?

Wisconsin Department of Revenue

From reading that, it does appear that you can prepay your state tax. This is somewhat unusual, but it looks like WI does allow for it. In that case, it should not be an overpayment on the return. Accordingly, I would think you would not have a potentially taxable refund. It appears this could work.

As mentioned above, depending on your particular tax situation, you may want to see if AMT will come into play as theses taxes would be an adjustment for AMT purposes.

Did you file your 2011 taxes yet and how did it work out?
I pre-paid my 2012 WI taxes and also hope to deduct these prepaid estimated state income taxes on my federal return.
2 questions:
– The 2011 IRS tax guide (p150) makes it sound that I cannot deduct these, since there is no reasonable basis to believe that I have this additional liability. Of course the IRS guide is not WI specific.
– How to you actually file this. I am using Turbotax (online) and there doesn’t seem to be a place for it.
It also automatically adds it to the State return and sure enough it shows up as an overpayment.

I did file already. I did them by hand as all of the software I looked at using would just increase the amount of my state refund.

Did you add any additional documentation with the federal return, since the amount on your W-2 won’t match line 5a on the Schedule A?
I might file my federal return electronically and then file the WI return by hand.

I sent a copy of the prepay stub. That was it. I didn’t get my return yet though.

Let me know how it turns out – if you don’t mind.
I am tempted to file the federal return via turbotax (w/o the pre-pay stub) and then print out the WI return , make the change and mail it in.
Thanks for your help.