State and Federal Income Tax Arbitrage
Stumble It!
Digg It!
Tip It!
del.ico.us
FacebookAs I noted earlier this week, today is the deadline for second quarter estimated tax payments. Since we’ve experience a relatively sizable uptick in income that’s not subject to withholding, we’re actually on our own for a good bit in the way of taxes. That being said, we can can actually hold back a good bit of this money until taxes are due next spring, allowing us to earn interest on the difference. The key here is to pay enough to avoid an underpayment penalty, but beyond that there’s no need to pay more than you want. Just be sure that you set aside sufficient funds to cover your tax bill when it comes due at the end of the year. In our case, we’re earmarking 50% of net profits to go into a special account to cover our SEP-IRA contributions as well as our state and federal tax liabilities (we make our estimated payments out of that account and will then pay the balance due from it at tax time).
Published on June 15th, 2007 - 4 Comments
Filed under: Taxes
email this article
- bookmark it
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
Related articles...
» My First Encounter with the Alternative Minimum Tax (AMT)» Don’t Miss These Tax Breaks, Part 1
» How do Federal Income Tax Brackets Work?
» Should You Pay Your Taxes With a Credit Card?
» Some Stimulus Payments Diverted to Pay Outstanding Debts
» From the Archives (June 8th – July 5th)
» 2007 Taxes Filed (Sorta)
» Treasury Securities: A Survey of What’s Available
Was this article useful? Please sign up to receive our content via e-mail:
4 Responses to “State and Federal Income Tax Arbitrage”
Leave a Reply
Great deals...
Readers’ choice...
Recent articles...
- More on Lending Club's Reduced Interest Rates
- New Home, New Expenses
- Lending Club Reduces Interest Rates for Borrowers
- Save for Retirement With a Spousal IRA
- How to Handle a Missing 1099 Form
- Pursuing Financial Independence: Now What?
- Determining Your Financial Priorities
- Lending Club Update - December/January Performance
- 2010 Outlook for Mortgage Rates
- Reducing Your Automotive Expenses
Most talked about...
- Dave Ramsey is Bad at Math
- $8,000 Homebuyer Tax Credit
- How to Claim the First-Time Homebuyer Tax Credit
- Dish Network Customer Service SUCKS
- $15,000 Homebuyer Tax Credit
- Reduced Credit Limits? Share Your Experience
- Pay Off Mortgage Early? Or Invest?
- Would the "Fair Tax" Gut the Economy?
- $7500 First Time Homebuyer Tax Credit
- Tax Stimulus Rebate Payments to Start Early
- Best Online High Interest Savings Accounts (Updated!)
- Life's Too Short to Drink Cheap Beer
June 15th, 2007 at 3:40 pm
Great! don’t cough oup the money till you have to.
I do the same with federal. I set my exeptions to 25 (so I pay no federal tax) and then max out my 401k. Then, I use IRSs withholding calculator to calc and pay all my taxes in the last month of the year.
June 16th, 2007 at 3:13 pm
Brok – 25 exemptions is aggressive. I use 12 exemptions, and it knocks down my withholding pretty well. I’ve read that 12 is the most you can submit on a W-4 without providing additional information.
I plan on owing $12k – $15k in taxes next April, interest/penalty free.
June 17th, 2007 at 3:08 am
And to think I’ve been paying taxes the hard way all these years.
Is this a great country or what?
July 28th, 2007 at 12:45 am
The converse is also true. If you owe the state money in a calendar year, you can take it as an extra deduction against your federal income, since it was a state income tax paid.