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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Rage on June 14, 2015, 09:00:25 PM

Title: Tax "Arbitrage" - Overpaying state inc tax last year before FIRE
Post by: Rage on June 14, 2015, 09:00:25 PM
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?
Title: Re: Tax "Arbitrage" - Overpaying state inc tax last year before FIRE
Post by: MDM 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.