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Here is a quote from the Investment Tax Guide 2000:

"Remember that you can't simply go wild regarding the prepayment of state taxes. The IRS may disallow deductions for large estimated state income tax payments solely to increase itemized deductions."

Suppose I have a spike in income for the year 2000 as compared to 1999. And suppose I've been paying minimal estimated state taxes to qualify for the safe harbor rule for avoiding tax penalty. And then on 12/31/2000, I send in a check to complete the payment of my state taxes for 2000 - suppose this check is an order of magnitude more than what I've been paying in previous quarterly installments. Would the IRS disallow the state tax paid deduction in this case? Or would they only disallow the deduction if you paid more than what you owed in state taxes?

Carl Erikson
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