This year (2016) I am a waged employee and will earn something close to $100K. Next year (2017) I don't plan to work at all so my projected income for 2017 would be $0.

Since the state tax that I paid this year (including the amount I overpaid) is deductible in my 2016 federal tax return. Wouldn't it make sense to dramatically overpay state tax this year and then itemize it?

For example, assuming I would overpay 40K in state taxes this year, then my taxable income for 2016 would be 100K-40K=60K. Next year I would receive from state 1099G form with 40K for which, I assume, I would have to pay tax in 2017, but it would be lower income tax bracket.

1 Answer 1


Nope, they thought of that.

See page 148 of IRS Pub 17:

Estimated tax payments. You can deduct estimated tax payments you made during the year to a state or local government. However, you must have a reasonable basis for making the estimated tax payments. Any estimated state or local tax payments that are not made in good faith at the time of payment are not deductible.

In your case, since your $40K payment far exceeds any reasonable estimate of your actual state tax liability, it wouldn't be deductible. If you tried to deduct it, it seems like a pretty good bet you'd be audited and have your deduction disallowed, and probably owe civil and/or criminal penalties.

Obligatory: https://xkcd.com/1494/

  • 3
    So it still makes sense to hedge on the high side, as long as you don't overdo it?
    – user32479
    Commented Apr 13, 2016 at 19:18
  • @Brick: yes....
    – user102008
    Commented Apr 13, 2016 at 22:22
  • What, not this one? xkcd.com/1566
    – user662852
    Commented Apr 14, 2016 at 20:35

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