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Taxes Become Counterintuitive

Contributed by mm | March 3, 2005 10:05 AM PST

It's not a coincidence that both SmartMoney and Money picked tax tips at its March cover story. After all, it is tax season again. Of course, some of the tips are well discussed at PFBlog. Take a look at our discussion of sales tax deduction, child care tax credit, free tax filing, just to name a few.

Well, nothing is simple when it comes to tax. Tom Herman's Tax Report column at WSJ Online recently explored some intricacies in sales tax deduction:

"If you live in a state with a hefty state income tax, don't automatically assume you should pick the income-tax deduction. Many retirees and other people who pay very little state or local income tax might be better off deducting sales tax. For example, they might have interest on Treasury bills, notes and bonds, which is tax-free in all states. And some states have special exemptions for certain types of income, such as pensions.

Here's a twist: Suppose you're affected by the alternative minimum tax. Because of the intricacies of the AMT and state and local income-tax calculations, residents of some states may be better off deducting sales taxes even if the state income taxes they paid were higher, says Martin Nissenbaum, national director of personal income-tax planning at Ernst & Young. "If you're in the AMT, the choice of which tax to deduct may have little or no impact on your federal tax liability, but deducting sales tax may make more sense from a state income-tax perspective," he says.

Thus, many people should consider running the numbers both ways to see which works best."

I am luckily living in the State of Washington, where there is no state income tax, so I don't need to worry about picking the right horse between the two. But if you have trouble figuring out the best option, you might want to talk to a tax pro and consider to file an extension. When it comes to tax, it's better late than wrong.

This Post Has Received 2 Comments. Share Your Opinions Too.


Joshua Ross Commented on March 3, 2005

Have you ever wondered why people continue to give the government interest free loans through the payroll tax only for the peace of mind to know their income taxes will be paid at year's end? For those of us who save plenty, doesn't it make sense to pay your entire income tax in March? Is that possible?


jmb Commented on March 3, 2005

If you wait until the end of the year to make payments, you'll be underwithheld and end up owing penalties. But you can file quarterly if you want to keep control of the money longer. Not sure if it's worth the marginal gain, but you can do it.


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