With a little over a month remaining in 2008, it is important to start year-end planning for tax year 2008 as there are still a number of things you can do to save on taxes and avoid costly mistakes.
If your income has increased from 2007 or you have some big, one-time gains, it is crucial that you pay 100% of your estimated state tax in the form of a estimates by 12/31/08. If you have been paying state estimates all year, you will still want to have your CPA estimate your taxable income to see if the 4th quarter estimate needs to be adjusted as estimates are always based on the prior year. If you are lucky enough to live in Washington or another state without state income tax, you still should watch out-of-state income and keep documentation on sales tax paid on big ticket items.
Why is it so important to pay your 4th quarter state tax estimate by 12/31/08 rather than the 1/15/09 deadline listed on the coupon?
Well, the reason is twofold:
- By paying the state tax within the taxable year, you increase your itemized deductions as state income tax is one of the vital itemized deductions if you live in a state with income tax.
- You also avoid possible alternative minimum tax (AMT) tax consequences in future years by paying your state tax in the taxable year. If you have significant income in one year and lower income the next year but you fail to make the 4th quarter state estimate until January (or worse – you pay in April or after with your return), then you could end up with AMT tax in that subsequent year with the lower income as state income tax is a preference item for AMT.
There is a lot to think about for 2008 tax planning, and I hope to cover many of the different opportunities and tax traps in the next few weeks in upcoming posts. However, talk to your CPA sooner than later – it will could end up saving you a considerable amount tax and a lot of regret.