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"Do capital gains affect the level of state income tax liability? And if so, if I have a large capital gain for 2001, should I increase my state income tax withholding? If I underpay, will there be a large penalty? Any insight into this situation would be greatly appreciated. "

See post # 54988 by ptheland in response to my question about cap gains. I have a situation with over $100K in cap gains this year, and it'll be taxed at the top rates in New Mexico (8.5%) even though we've moved to Washington State. If you have enough state tax due, it could also push you into the AMT next year if your income is low relative to your state taxes owed. You may (if I understand the AMT correctly) lose the ability to deduct much of your state taxes against next years' federal taxes. I recommend following ptheland and edcosoft's advice and calculating and prepaying in advance so that the state receives your prepayment by Dec 31st.

To ramble on - I found a state tax voucher I can use to prepay my NM taxes on the state website. I am also calculating my federal taxes this month so I know where I really will stand on April 15th. I tried to find tax software for 2001 but it won't come out till January, I called my accountant and asked if he could do my federal taxes early so I'd be sure how much I need to pay the state but he said his software for 2001 wouldn't be ready till January, so I'm using an Excel spreadsheet and doublechecking my entries.
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