state income tax withheld from IRA distribution?

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billjudy
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state income tax withheld from IRA distribution?

Post by billjudy »

Why does Vanguard not allow state income taxes to be withheld from an IRA distribution for states that it is not mandatory?
Last edited by billjudy on Tue Jul 29, 2014 8:56 pm, edited 1 time in total.
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

Lower cost. They do what they have to, not what you want them to do.
placeholder
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Re: state income tax withheld from IRA distribution?

Post by placeholder »

Why do want that withheld?
chaz
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Re: state income tax withheld from IRA distribution?

Post by chaz »

You could move to 9 states with no income tax.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
placeholder
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Re: state income tax withheld from IRA distribution?

Post by placeholder »

chaz wrote:You could move to 9 states with no income tax.
That's a lot of moving.
chaz
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Re: state income tax withheld from IRA distribution?

Post by chaz »

placeholder wrote:
chaz wrote:You could move to 9 states with no income tax.
That's a lot of moving.
Evading the tax collector by residing in 1 of the 9. :mrgreen:
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
john94549
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Re: state income tax withheld from IRA distribution?

Post by john94549 »

Based on my personal experience, there's no hard-and-fast rule. StateFarmBank and Alliant will withhold CA tax on IRA distributions, if requested. USAA (on my after-tax CD) would not, nor will my wife's pension administrator (although both withhold for Federal).
Topic Author
billjudy
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Re: state income tax withheld from IRA distribution?

Post by billjudy »

Just for information: Fidelity does withhold federal and state taxes based on your requested percent for South Carolina for IRA distributions.
Calm Man
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Re: state income tax withheld from IRA distribution?

Post by Calm Man »

I don't think you are correct. I just did an inherited IRA distribution. I live in NJ. WIthholding is not mandatory but they would have let me withhold I think.
gkaplan
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Re: state income tax withheld from IRA distribution?

Post by gkaplan »

TSP will not withhold state income taxes.
Gordon
nbseer
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Re: state income tax withheld from IRA distribution?

Post by nbseer »

Vanguard withheld my N.J. state tax on IRA distribution.. don't know about mandatory/non-mandatory factor.
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

Vanguard has five rules depending on where you live. I will let you figure out which applies to your state.
If federal tax is withheld, state tax withholding is mandatory. Vanguard will automatically withhold the minimum required by your state unless you specify a higher amount below.


If federal tax is withheld, state tax withholding is mandatory unless you specifically elect not to have state tax withheld. Vanguard will automatically withhold the minimum required by your state unless you either check the Don’t withhold box or specify a higher amount below.


If federal tax is withheld, state tax withholding is mandatory if your distribution is subject to the federal early withdrawal penalty. Vanguard will automatically withhold the minimum required by your state unless you specify a higher amount below.


State tax may be withheld regardless of your federal withholding election. Vanguard will or won’t withhold as you instruct below. If no box is checked, we won’t withhold.


If you aren’t a resident of a state listed above, skip to Section 6, as state tax withholding isn’t available for you at this time.
Note that the OP's premise is still wrong. Find the states where withholding is not mandatory but still possible.
for states that it is not mandatory
scrabbler1
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Re: state income tax withheld from IRA distribution?

Post by scrabbler1 »

My friend has an inherited IRA with Fidelity and can choose how much, if any, he wants to have withhheld in state (NY) and federal income taxes from his RMD.
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

scrabbler1 wrote:My friend has an inherited IRA with Fidelity and can choose how much, if any, he wants to have withhheld in state (NY) and federal income taxes from his RMD.
And what would Vanguard do? Which rule would apply to your friend? Does Vanguard have a different rule from Fidelity for residents of NY?
scrabbler1
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Re: state income tax withheld from IRA distribution?

Post by scrabbler1 »

sscritic wrote:
scrabbler1 wrote:My friend has an inherited IRA with Fidelity and can choose how much, if any, he wants to have withhheld in state (NY) and federal income taxes from his RMD.
And what would Vanguard do? Which rule would apply to your friend? Does Vanguard have a different rule from Fidelity for residents of NY?
Sorry, neither of us are Vanguard clients so I am not familiar wth their website or their rules about state income taxes withheld on IRA distributions. I would hope both are flexible like Fidelity's website is.
sport
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Re: state income tax withheld from IRA distribution?

Post by sport »

Vanguard will not withhold income tax for Ohio. If I make an IRA withdrawal, I must make other arrangements to pay the tax. It is an inconvenience, and I have asked them to change the policy. So far, they have not.
Jeff
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

jsl11 wrote:Vanguard will not withhold income tax for Ohio. If I make an IRA withdrawal, I must make other arrangements to pay the tax. It is an inconvenience, and I have asked them to change the policy. So far, they have not.
Jeff
Yes, Ohio is one of the states subject to the fifth rule, i.e., it is not listed above.
If you aren’t a resident of a state listed above, skip to Section 6, as state tax withholding isn’t available for you at this time.
By my count, there are twenty-four states listed above.
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

So here are my questions:

Why does Vanguard divided the states into five different categories with different rules for each?

Are they just messing with us, or are there state laws or regulations to be followed?

If there are laws, are they permissive or restrictive?

Do other providers follow the same laws?
JW-Retired
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Re: state income tax withheld from IRA distribution?

Post by JW-Retired »

jsl11 wrote: Vanguard will not withhold income tax for Ohio. If I make an IRA withdrawal, I must make other arrangements to pay the tax. It is an inconvenience, and I have asked them to change the policy. So far, they have not.
Jeff
I can confirm Vanguard will withhold income tax for California...... but the tax rate is double that of Ohio. :(

Count your blessings.
JW
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gerntz
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Re: state income tax withheld from IRA distribution?

Post by gerntz »

I had no problem at Schwab having state taxes withheld from IRA withdrawal. Did required 10% minimum Fed tax withholding as part of the deal and 1% non-taxes distribution, so maximum state % was 89.
sport
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Re: state income tax withheld from IRA distribution?

Post by sport »

sscritic wrote:
jsl11 wrote:Vanguard will not withhold income tax for Ohio. If I make an IRA withdrawal, I must make other arrangements to pay the tax. It is an inconvenience, and I have asked them to change the policy. So far, they have not.
Jeff
Yes, Ohio is one of the states subject to the fifth rule, i.e., it is not listed above.
If you aren’t a resident of a state listed above, skip to Section 6, as state tax withholding isn’t available for you at this time.
By my count, there are twenty-four states listed above.
I don't understand why Vanguard can withhold tax for 24 states, but not for the others that have income taxes. I cannot imagine that the states would refuse to take money from Vanguard. Vanguard is already set up to withhold for some states, so why not offer the service for the others?
Jeff
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

jsl11 wrote: I don't understand why Vanguard can withhold tax for 24 states, but not for the others that have income taxes. I cannot imagine that the states would refuse to take money from Vanguard. Vanguard is already set up to withhold for some states, so why not offer the service for the others?
Jeff
I gave one possible answer in a previous post: because they want to mess with us.

I also gave another possible answer, which I won't repeat.
JW-Retired
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Re: state income tax withheld from IRA distribution?

Post by JW-Retired »

jsl11 wrote: I don't understand why Vanguard can withhold tax for 24 states, but not for the others that have income taxes. I cannot imagine that the states would refuse to take money from Vanguard. Vanguard is already set up to withhold for some states, so why not offer the service for the others?
Jeff
I think it's as simple as there is a cost for doing this and Vanguard is a cheap low cost fund company. So they do it only if the state requires it.

Many us appreciate rock bottom costs.
JW
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sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

Although this is pick on Vanguard week, let's not forget other providers.

Here is Fidelity:
No state tax withholding is available (even if your state has income tax).
Eleven states are listed; some don't have an income tax and some do.

Now someone else check out another provider. I have provided facts for two; it's someone else's turn to go fact finding.
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HueyLD
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Re: state income tax withheld from IRA distribution?

Post by HueyLD »

........
Last edited by HueyLD on Sat Feb 07, 2015 2:34 pm, edited 1 time in total.
sport
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Re: state income tax withheld from IRA distribution?

Post by sport »

I do not believe it is that expensive when the mechanism is already in place. All Vanguard would need is an account number to transfer into for each state, and the taxpayer ID number to credit the proper account. Vanguard already has our taxpayer ID numbers. Accordingly, it would be just a simple choice on the withdrawal page, and the computers would take care of the rest. It would probably cost less to do that than have their CRs explain to many people why they cannot have their taxes withheld.
Jeff
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

jsl11 wrote:I do not believe it is that expensive when the mechanism is already in place. All Vanguard would need is an account number to transfer into for each state, and the taxpayer ID number to credit the proper account. Vanguard already has our taxpayer ID numbers. Accordingly, it would be just a simple choice on the withdrawal page, and the computers would take care of the rest. It would probably cost less to do that than have their CRs explain to many people why they cannot have their taxes withheld.
Jeff
If it is so easy, why won't Fidelity do it? Have you checked with other providers? Do they do it?

You say it is easy, but perhaps when you get down to the nuts and bolts, it isn't as easy as you think.
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mapleosb
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Re: state income tax withheld from IRA distribution?

Post by mapleosb »

sscritic wrote:Although this is pick on Vanguard week, let's not forget other providers.

Here is Fidelity:
No state tax withholding is available (even if your state has income tax).
Eleven states are listed; some don't have an income tax and some do.

Now someone else check out another provider. I have provided facts for two; it's someone else's turn to go fact finding.
I may be reading this incorrectly, but, if you are saying that Fidelity does not withhold State tax from IRA distributions, you are incorrect. I have been having withholding, Federal and state, taken out for the last 12 years. One of the reasons that I do not use Vanguard is because I am in one of the states they will not do withholding, I have been asking for 12 years. Or are you just referring to 11 states listed somewhere on their site? Where did you find that quote please?
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

mapleosb wrote:
sscritic wrote:
No state tax withholding is available (even if your state has income tax).
Eleven states are listed; some don't have an income tax and some do.
I may be reading this incorrectly, but, if you are saying that Fidelity does not withhold State tax from IRA distributions, you are incorrect. I have been having withholding, Federal and state, taken out for the last 12 years. One of the reasons that I do not use Vanguard is because I am in one of the states they will not do withholding, I have been asking for 12 years. Or are you just referring to 11 states listed somewhere on their site? Where did you find that quote please?
Yes, you are reading it incorrectly. I did not say that Fidelity would not withhold from 50 states, I said they would not withhold from one category of states, of which there are eleven. (I was writing in the context of this thread where I had previously reported that Vanguard put states into categories.)

Fidelity, like Vanguard, puts different states into different categories. Not all states are treated equally. Vanguard has five categories; Fidelity has nine categories. The number of states in each category at Fidelity is 11, 7, 3, 1, 1, 1, 1, 1, and the rest (25 unspecified states, since D.C. is include in another category). Fidelity has different rules for different states, just as Vanguard does.

I am still waiting for a report on another provider. Are Fidelity and Vanguard really the only places that bogleheads have IRAs?
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

OK, I will give the results for a third provider. TIAA-CREF has a spaghetti bowl full of forms and rules. Single payments, periodic payments, rollover eligible, non-rollover eligible, brokerage, and who knows how many more. My head hurts.

Here is just one:
3. Withholding Election (Choose one)

Based on your state of legal residence, state income taxes will be withheld
from your payments at the following rate, unless you choose one of the available options.

Arkansas 3%
California 10% of federal withholding
Delaware 5%
District of Columbia* 8.95%
Georgia No Withholding
Iowa** 5%
Kansas No Withholding
Maine 5%
Maryland No Withholding
Massachusetts 5.20%
Michigan 4.25%
Nebraska 5%
North Carolina 4%
Oklahoma 5%
Oregon 8%
Vermont 24% of federal withholding
Virginia 4%
* District of Columbia residents: The default is”no withholding”, however, withholding will apply and you cannot opt out if you are taking a lump sum of your entire account.

** Iowa residents: If you do not make a state election and your payments are less than $6,000 per payment, there will be no state withholding.
If you would like state withholding from your distribution in an amount OTHER THAN the state prescribed rate, please check the appropriate box below and indicate your election.

I choose the following percentage be withheld from the taxable portion of my payment:   %

I choose NOT to have taxes withheld from my payment or my distribution is exempt. (For Iowa, Maine, Massachusetts and Nebraska Only: You can elect no state withholding only if you have elected no federal withholding.)

For Massachusetts Only: Instead of electing a fixed percentage, I choose : (May select more than one option)
  • Total number of withholding allowances
    Head of Household
    Withhold the following ADDITIONAL amount from each payment $
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mapleosb
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Re: state income tax withheld from IRA distribution?

Post by mapleosb »

sscritic wrote: Yes, you are reading it incorrectly.
Thank you
Dandy
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Re: state income tax withheld from IRA distribution?

Post by Dandy »

A better question is why don't all states require it? Why are they willing to wait to get money when the Federal Gov won't. I wish VG would allow withholding as an option on all distributions. Once the programming was done I would assume any additional costs would be marginal.
Tom_T
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Re: state income tax withheld from IRA distribution?

Post by Tom_T »

HueyLD wrote:O.k., folks. Vanguard made a carefully decision to withhold state taxes only when required by law. It is expensive to have to collect and file taxes with states.

It's one way to hold down the cost. If tax withholding is important to you, you may want to transfer your money elsewhere. It's hard to have the cake and eat it too.
I live in NJ, and I have NJ tax withheld from my Vanguard Inherited IRA distribution, and it is certainly not mandatory. I had it set to zero until this year.
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

Dandy wrote:A better question is why don't all states require it?
Excuse me. I take a distribution from Vanguard at age 50. They withhold federal tax. I open an IRA at Fidelity* and send them a check equal to the total withdrawal, what I got plus what the IRS got. I have to have a spare amount in my checking account equal to the withholding.

Now if there had been state withholding, I would have to come up with even more money out of my checking account to avoid early withdrawal tax and penalties. No thank you.

* I actually can just change my mind and send it back to Vanguard within 60 days. I still need to come up with the extra money to cover the withholding. Less withholding is better.

P.S. Don't you like a good float when you can get one? Do you always get a tax refund because you like giving money to the feds and your state early? Once again, no thank you. Let me decide when I want to pay my taxes.
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

Tom_T wrote: I live in NJ, and I have NJ tax withheld from my Vanguard Inherited IRA distribution, and it is certainly not mandatory. I had it set to zero until this year.
Ah, NJ.
State tax may be withheld regardless of your federal withholding election. Vanguard will or won’t withhold as you instruct below.
Different strokes for different folks, that's the Vanguard (and Fidelity and TIAA) way.
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HueyLD
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Re: state income tax withheld from IRA distribution?

Post by HueyLD »

................
Last edited by HueyLD on Sat Feb 07, 2015 2:34 pm, edited 1 time in total.
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

The may is yours, not theirs. You may by so indicating. No withholding is the default.
Dandy
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Re: state income tax withheld from IRA distribution?

Post by Dandy »

P.S. Don't you like a good float when you can get one? Do you always get a tax refund because you like giving money to the feds and your state early? Once again, no thank you. Let me decide when I want to pay my taxes.

I love a good float.

I was speaking from the State's point of view. They are all (most) hungry for revenue, loath to raise taxes, getting less revenue from gas tax since vehicles use less gas, etc -- just surprised they haven't all required getting money early instead of tricks like raiding the highway fund or pension contributions.
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

Dandy wrote: I was speaking from the State's point of view. They are all (most) hungry for revenue, loath to raise taxes, getting less revenue from gas tax since vehicles use less gas, etc -- just surprised they haven't all required getting money early instead of tricks like raiding the highway fund or pension contributions.
Got it. Of course that's just cash flow, not real revenue, assuming your citizens aren't tax cheats. The other way to look at it: they get the float, you don't. That does make sense from the state's point of view.
scrabbler1
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Re: state income tax withheld from IRA distribution?

Post by scrabbler1 »

As we have discussed in other threads over the years, withholding is the best way to remain in that "safe harbor" to avoid penalties for underwithholding. With my friend's Fidelity (Inherited) IRA, we use the RMD to keep him in one of those safe harbors because he has a lot of investment income with no federal or state income taxes withheld. By having state income taxes withheld, we not only solve his safe harbor issue on the state side but we can also deduct it on his federal return instead of waiting another year. This worked well in 2013, the first year he had to take a RMD, and we plan to do it again later this year.
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

scrabbler1 wrote:With my friend's Fidelity (Inherited) IRA, we use the RMD to keep him in one of those safe harbors because he has a lot of investment income with no federal or state income taxes withheld. By having state income taxes withheld, we not only solve his safe harbor issue on the state side but we can also deduct it on his federal return instead of waiting another year.
It is true that withholding is preferable to estimated payments on the margin (of penalty or no penalty) at the federal level, and may be at the state level depending how the state figures the penalty. However, an estimated state tax payment made in December, 2014, is deductible on your 2014 federal return; there is no need to wait a year. Waiting until 2015 to pay your state tax does make you wait until you file your 2015 federal return to get the deduction.

Note that this is an area with the potential for bunching if you are only marginally able to use itemized deductions. Pay 2015 tax in 2015 and also make 2016 estimated tax payments in 2015. In 2016, pay as little as you can. In 2017, double up again. Bunch your property taxes if you can as well; you will enjoy the double dip.
LongerPrimer
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Re: state income tax withheld from IRA distribution?

Post by LongerPrimer »

Inherited ira. I got to check off the boxes. Small amount (500) nherited. If you have a large amount, financial institution .at not have a choice to give to you. Uncle wants to be sure it gets its rightful share.

So how much are you taking out?
scrabbler1
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Re: state income tax withheld from IRA distribution?

Post by scrabbler1 »

sscritic wrote:
scrabbler1 wrote:With my friend's Fidelity (Inherited) IRA, we use the RMD to keep him in one of those safe harbors because he has a lot of investment income with no federal or state income taxes withheld. By having state income taxes withheld, we not only solve his safe harbor issue on the state side but we can also deduct it on his federal return instead of waiting another year.
It is true that withholding is preferable to estimated payments on the margin (of penalty or no penalty) at the federal level, and may be at the state level depending how the state figures the penalty. However, an estimated state tax payment made in December, 2014, is deductible on your 2014 federal return; there is no need to wait a year. Waiting until 2015 to pay your state tax does make you wait until you file your 2015 federal return to get the deduction.

Note that this is an area with the potential for bunching if you are only marginally able to use itemized deductions. Pay 2015 tax in 2015 and also make 2016 estimated tax payments in 2015. In 2016, pay as little as you can. In 2017, double up again. Bunch your property taxes if you can as well; you will enjoy the double dip.
We have had several threads about this over the years and I am quite aware of both concepts. Neither apply to my friend and his inherited IRA but they do apply to me. I frequently review my ability to bunch although I have to see its impact on the ACA subsidy because if I itemize, I will have to report my state school tax rebate as income and that counts toward the MAGI which is used to determine the subsidy. I am near the top end of the income limit for ACA subsidies so adding that "income" may cause me to lose some or all of the aubsidy. It's complicated. :|
pshonore
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Re: state income tax withheld from IRA distribution?

Post by pshonore »

sscritic wrote:
scrabbler1 wrote:With my friend's Fidelity (Inherited) IRA, we use the RMD to keep him in one of those safe harbors because he has a lot of investment income with no federal or state income taxes withheld. By having state income taxes withheld, we not only solve his safe harbor issue on the state side but we can also deduct it on his federal return instead of waiting another year.
It is true that withholding is preferable to estimated payments on the margin (of penalty or no penalty) at the federal level, and may be at the state level depending how the state figures the penalty. However, an estimated state tax payment made in December, 2014, is deductible on your 2014 federal return; there is no need to wait a year. Waiting until 2015 to pay your state tax does make you wait until you file your 2015 federal return to get the deduction.

Note that this is an area with the potential for bunching if you are only marginally able to use itemized deductions. Pay 2015 tax in 2015 and also make 2016 estimated tax payments in 2015. In 2016, pay as little as you can. In 2017, double up again. Bunch your property taxes if you can as well; you will enjoy the double dip.
Before I did this for state income taxes, I would want to confirm that in the particular state, estimated payments for tax year 201X (next year) can be made in the current year. Otherwise you may just get a much bigger refund than you thought. Or am I misunderstanding something?
sscritic
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Re: state income tax withheld from IRA distribution?

Post by sscritic »

pshonore wrote:
sscritic wrote:However, an estimated state tax payment made in December, 2014, is deductible on your 2014 federal return; there is no need to wait a year. Waiting until 2015 to pay your state tax does make you wait until you file your 2015 federal return to get the deduction.

Note that this is an area with the potential for bunching if you are only marginally able to use itemized deductions. Pay 2015 tax in 2015 and also make 2016 estimated tax payments in 2015. In 2016, pay as little as you can. In 2017, double up again. Bunch your property taxes if you can as well; you will enjoy the double dip.
Before I did this for state income taxes, I would want to confirm that in the particular state, estimated payments for tax year 201X (next year) can be made in the current year. Otherwise you may just get a much bigger refund than you thought. Or am I misunderstanding something?
I messed up. Sorry.

The first part is correct: state estimated taxes paid in 2014 for 2014 are deductible on your 2014 federal return. The second part is messed up. The idea is correct, but the dates are wrong.

Say you started last year. You made an estimated state payment for 2013 in January 2014. You paid the remainder of your 2013 state tax in April 2014. You make your last estimated 2104 state tax payment in December of 2014. That could be six state tax payments, all made in 2014 for two different tax years. If you have done it right, you neither owe nor get a refund on your 2014 return filed in April 2015.* You make no estimated tax payments the rest of 2015. Of course, you want to stay within your state's safe harbor to avoid penalties.

Now start over. You make an estimated payment on your 2015 taxes in January 2016. You pay the remainder of your 2015 state tax in April 2016. yada yada. Just stay on the two year cycle.

* The worst thing you can do is make a state estimated payment in January and get a state refund. Since the refund is partially from payments made in 2013 and partially from the January 2014 payment, only part of it was deducted when you did your 2013 federal return (unless you used the standard deduction in 2013, which is the goal - itemize in the even, standard in the odd). Now you get to learn about recoveries. I did the hard way. :(

On second thought, it might not be worth all the trouble.
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