Author Topic: Tax "Arbitrage" - Overpaying state inc tax last year before FIRE  (Read 1920 times)


  • Stubble
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Suppose a hypothetical person makes $100K/year.  He doesn't put any money into tax advantaged accounts (for simplicity).  He pays about $17K in federal income taxes. 

But the last year before retirement, he sets his state withholding crazy-high - $25K extra for the year.  As a result he gets an extra $6500 back on his federal income taxes (because he itemizes deductions and deducts his state income taxes).  He also gets a $25K refund on his state income taxes, obviously.

The next year that $25K state income tax refund counts as income but he's in a lower tax bracket - according to the TurboTax Taxcaster webpage, if he has no other income that next year he'll owe about $1750. 

So this technique saved him about $5K in federal taxes. 

But is it legal?


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Re: Tax "Arbitrage" - Overpaying state inc tax last year before FIRE
« Reply #1 on: June 14, 2015, 09:07:12 PM »
Yes.  This is similar to paying property taxes every other calendar year, and both the state income and local property tax strategies have been noted in other threads.