Author Topic: Tax under withholding strategy  (Read 1487 times)

stuckinmn

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Tax under withholding strategy
« on: November 24, 2014, 10:10:15 PM »
Question for seattlecyclone, Brooklynguy or other tax gurus out there.

I haven't withheld enough so far this year so I'm planning on telling my employer to take extra amounts out of my year end bonus for both state and federal to avoid penalties for under withholding. However, this year I'll be hit with the AMT making any state tax deduction worthless.  Next year, after I pull the FIRE ripcord midyear I won't have the AMT issue and will likely be in the 15 or 25% bracket.

I'm considering having the larger amount withheld from my bonus for federal taxes to avoid penalties but leaving the state amount alone so I'll owe a lot on my state return.  I'll just pay the penalty (2% I think) and the state taxes owed in 2015 when they will be deductible and therefore worth 15-25%.

Any flaws in this plan that I'm missing?  Is this legal and will it work?

Thanks in advance.


MDM

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Re: Tax under withholding strategy
« Reply #1 on: November 24, 2014, 10:22:37 PM »
Interesting strategy - good thinking ahead.

State taxes are entered in your federal itemized deductions for the year in which you pay them, so I don't see any legal problems with your idea.  If you can minimize your tax bill for 2014 and 2015 combined, even with the 2014 state penalty, then go for it.

The logic is similar to that in the recent thread on paying property taxes in "every other" year to get itemized deductions over the standard deduction threshold.