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Author: schreige Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120812  
Subject: Self Employed Tax Question. Date: 12/9/1999 2:17 PM
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Hi Here's my scenario
for the first 9 months of the year i was a 1040 employee and made around 50k. For the last
3 months I've been a self employed contractor and will
make around 40k. Now my question is this. I've read throught the estimated tax payment rules for both federal and state and I'm not required to make payments. (I've already had more withheld this year than my tax for last year). My question is with the
state and local income tax itemized deduction. I've deciphered it as you can deduct all the state taxes I've had withheld this year as well as any estimated tax payments. So, I'm thinking I can get a better federal tax deduction if I pay an estimated state tax payment even though I'm not required to. Is this possible and if so is it the right thing to do. I want to do it this year because I can itemize a lot more this year than I'll be able to next year. (and what really matters is how much over 4500 you can itemize any way i guess). Any help would be fantastic.

Also, If i do work in december but don't get paid until January does it count on my 99 or 00 taxes.
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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22697 of 120812
Subject: Re: Self Employed Tax Question. Date: 12/9/1999 2:42 PM
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I always pay my 1/15/xx state tax estimated tax payments on 12/30/xx-1 so that I can tax a federal deduction for that estiamted payment a year earlier. This a regular, legal & smart thing to do.

Regards 12/99 fees & I presume you are a cash basis tax payer, those fees received in 1/00 apply as income in 2000.



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Author: bkcpa1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22714 of 120812
Subject: Re: Self Employed Tax Question. Date: 12/9/1999 5:39 PM
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Dear Schreige,

First off, if you make your state estimated payment prior to 12/31, you can deduct it in 1999. However, you lose the use of the money for 4 months and give your state an interest free loan for that period of time. This is especially true if you get a refund at April 15th. In addition, if your withholdings and estimates that you have already made are equal to last year's tax liability you are in a "safe-harbor" situation and should not be subject to underpayment penalties.

Secondly, you are a cash basis taxpayer. That means that you recognize income when you receive it and expenses when you pay them (except if you charge an item on your credit card). When you charge an expense on your credit card you get the deduction in the year it hits your credit card. The income you bill in December 199 but don't receive until January 2000 will be reported on your 2000 income tax return.

Sincerely,

Brian Keith, CPA
Fool name: bkcpa
e-mail address: bnb@sover.net



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Author: mphipps Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22751 of 120812
Subject: Re: Self Employed Tax Question. Date: 12/10/1999 1:12 AM
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What I think you might have missed in your reading is this thing called self employment tax. Its 15.24 of the net amount coming from you Schedule C. So if you got 4oooo of net revenue you got a big tax bill.
28% of 40000 and 15.2% of 40000
That is 43.2% of 40000 has to be payed.

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Author: theslayor Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22757 of 120812
Subject: Re: Self Employed Tax Question. Date: 12/10/1999 2:07 AM
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Ahhhh, trying to buy deductions, ay?

In respective order of your questions,

1.) Yes, you will get a bigger deduction for state taxes paid in 1999 on your 1999 return, by increasing your estimated withholding payments made in 1999.

2.) Not necessarily the right (?) thing to do, but maybe. This is the tricky part. Since you overpaid your state taxes for 1999, you will receive a refund of your overpaid 1999 state income taxes in 2000 for the excess payments made (I am assuming that you file early to get your money back). When you receive the refund in 2000, it is included in your gross income for 2000. The tricky part is twofold: first, you have defered the tax on the money (but then you have not had the use of it either); second, in which year was your marginal tax rate higher, and therefore in which year was your deduction worth more (in 1999 when you were at 39.6%, hypothetically, or in 2000, when you were at 5%?).

3.) Absent some bizarre facts (like receiving a check in your mail box, but not getting your mail until the next year), the payments impact the year in which they are received. This may not answer your question as to "count on your 99 or 00 taxes" because you can carry benefits over/back, but I bet it does.

Just a thought...

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22774 of 120812
Subject: Re: Self Employed Tax Question. Date: 12/10/1999 4:28 AM
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Actually, SET is 15.3% of 92.35% of $40,000 or $5,652, 1/2 of which is deductible from your Gross Income. Or 14.12955%

$40,000 - 2,826 - 4300 (assuming single standard deduction) - 2,750 exemption = $30,124 = $5,087 in taxes since $25,750 is at 15%.

Total bite of $ 40,000 = 26.85%

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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22787 of 120812
Subject: Re: Self Employed Tax Question. Date: 12/10/1999 9:22 AM
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Thanks for clarifying that for everyone Roo, but I don't know why mphipps even brought it up. From schreige's first post he knew he was doing a "safe harbor" and so would have taxes to pay in April. Also, his concern was how to reduce his 1999 total taxes with a prepayment (not overpayment) of his State taxes. He wouldn't have to worry about the 2000 tax on the state refund as the slayor suggests unless he overpaid and got a refund. Ed

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Author: mphipps Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22798 of 120812
Subject: Re: Self Employed Tax Question. Date: 12/10/1999 12:27 PM
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But he said he had 50000 in taxable income already so its 28% on the 40000.

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22827 of 120812
Subject: Re: Self Employed Tax Question. Date: 12/10/1999 5:31 PM
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"But he said he had 50000 in taxable income already so its 28% on the 40000."

No, what he actually said was "for the first 9 months of the year i was a 1040 employee and made around 50k."

We don't know what his taxable income is.

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