Year End tax planning

The two main issues are: 1) advance tax payments in 2017 may place you in AMT territory where they won't provide (as much of) a benefit on this year's tax return, and 2) the refund in 2018 is taxable income in 2018, even if it's a refund of real estate tax, to the extent there was a tax benefit in 2017. (That is, the rules for the tax treatment of a real estate tax refund are the same as for a state income tax refund. You don't just net the refund against the current year payments.)

Ira Smilovitz, EA

Under current tax law, when you get a refund you have to report it as income if you took the deduction in the previous year. If you're in the same tax bracket in the two years there's no net benefit -- you'll pay in 2019 what you saved in 2018.

I'll bet this provision will still be in first year under the new tax bill. But if you think there's a chance that this will go away along with the deduction, you could try overpaying. It could work, and at worst it will still just break even.

You are missing the fact that they have your number. Per the conference committee reconciled bill (just released):

??(B) the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this sub section for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return). The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212. For purposes of subparagraph (B), an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, shall be treated as paid on the last day of the taxable year for which such tax is so imposed.??.

For tax planning, I've found a spreadsheet called 16_1040 to be much more useful. The author updates it annually. Google the reference (I don't know if I can post the actual link here) and download it.

On Saturday, December 16, 2017 at 5:31:29 AM UTC-5, Taxed and Spent wrote: (B), an

For those of us who don't read gibberish, what does this mean?

The issue here is whether estimated state tax payments made in 2017 for 2017 can be deducted from the 2017 Federal return. I don't see that the text above bears on it; as 2017 is NOT after December 21, 2017. Yes? No?

The second issue is if my County tax bill, that I am getting on 12/27/17, is deductible from my 2017 federal return if paid in 2017. Again, I don't see that the text addresses this.

It means you can't deduct prepaid taxes for taxes due on or after

1/1/18.

You can't deduct money paid in 2017 for any taxes "imposed" from

1/1/18 on. It doesn't say you can't deduct prepayments for taxes not "imposed," if you are overpaying. However if you overpay, that overpayment isn't deductible in any case.

If it is "imposed" before the end of 2017, which it appears that your is, then you can deduct it if you pay it before the end of 2017.

If you don't read gibberish, you are in the wrong place. This is a tax forum, after all.

My take on this is you cannot prepay your 2018 state income taxes and get the benefit of the higher deduction in 2017. This will prevent arbitrage of saving on your higher 2017 tax rates and treating the refund as income at the lower 2018 tax rates.

This doesn't seem to apply to county property tax bills, but I think existing tax law prevents you from getting too carried away with prepayments. But if you get a bill and pay it in 2017, it is deductible in 2017. So more people than usual will be paying the second half in

2017, rather than 2018.

If your property taxes have been assessed and billed, you can pay that amount by year-end.

If you will be impacted by the 2018 $10,000 cap on state taxes (income and property), then you should pay as much as the law allows in 2017. I already mentioned property tax. That leaves income tax. The rules are that any payment of state estimated income tax must have a reasonable basis. As to the definition of "reasonable basis"....... who knows! Clearly making a $20,000 estimated payment when your state income taxes are only $5000 would not be reasonable. Prepaying $5000 (withholding and estimated) against a $4000 total would be reasonable. It is now Dec.

16th and most people already have a pretty good fix on their 2017 state tax bill. So, unless you have a pretty large unknown amount of income over the next two weeks, you would be limited in the amount you could prepay and aver it was reasonable.

As someone else already mentioned, any amount of state income tax for tax year 2018, that you prepay in 2017, will not be deductible on your

2017 federal return as that rule is hard coded in the conference bill. >

It means that you are free to prepay your 2018 income taxes, but you can't deduct them till you file your 2018 return.

The tax return filed in April 2018 is year 2017 taxes. The prohibition concerns year 2018 taxes, that would ordinarily be paid in 2019. Estimated state taxes I pay now for year 2017 will be deductible off my 2017 tax return filed in April 2018.

Is that right, or I completely confused? Sorry, for being dim about this; I have an MBA, but also have dyslexia and get confused about things like this. I can look up "debit" and "credit" and 5 minutes later not know which is which. I understand the concepts, but can't remember the terms.

The last Tax Bill update thwarts my "pay the 1H2018 tax bill on 12/29 plan. It's covered on p 87 - 88. And specifically does away with this strategy.

If you will be itemizing in 2017 and there is a possibility you won't be itemizing in 2018, my interpretation is that 2017 is a year you want to make VERY sure your 2017 State Income Tax estimated tax payments (paid in 2017) are at least as big as your 2017 State Income Tax obligations. At worst, if you overpay, you deduct at your 2017 marginal tax rate and have to declare the refund as income in 2018 and pay the taxes at your (hopefully lower) 2018 marginal tax rate.

Whether you can use this tactic to intentionally and grossly overpay your 2017 State Income tax estimated taxes to take the deduction at 2017 rates and declare the refund as income in 2018 (and pay tax at lower 2018 rates) is something I don't know. Is there something in law or IRS regulations that forbids this tactic?

It does away with prepaying "State or local INCOME tax," not property tax. As far as I can see, you can still prepay property tax that would be due in 2018.

Bob Sandler

...as long as it has been assessed and billed.