Prepaying 2017 state/local taxes before end of 2016

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NorCalDad
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Prepaying 2017 state/local taxes before end of 2016

Post by NorCalDad » Sat Nov 19, 2016 11:58 am

I'd like to pay as much of my state/local 2017 taxes by the end of this year for deduction purposes. I won't say exactly why, other than I believe it to be optimal tax planning for our household. I'm already planning to pay our 2017 spring property tax installment before Dec. 31, which our county allows.

Are there other ways to front-load state/local taxes in California?

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dodecahedron
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by dodecahedron » Sat Nov 19, 2016 12:02 pm

Note that if you do what you propose by overpaying your estimated state income taxes in 2016, the refund of your 2016 state taxes that you file for in April 2017 will generally be taxable income to you (on line 10 of your 2017 Form 1040) and this is true EVEN IF you apply the refund to your estimated taxes for 2017.

NorCalDad
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by NorCalDad » Sat Nov 19, 2016 12:10 pm

dodecahedron wrote:Note that if you do what you propose by overpaying your estimated state income taxes in 2016, the refund of your 2016 state taxes that you file for in April 2017 will generally be taxable income to you (on line 10 of your 2017 Form 1040) and this is true EVEN IF you apply the refund to your estimated taxes for 2017.
Thanks. I hadn't thought that one through when I posted originally. That makes sense.

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by MikeG62 » Sun Nov 20, 2016 5:38 pm

NorCalDad wrote:I'm already planning to pay our 2017 spring property tax installment before Dec. 31, which our county allows.
Some municipalities will allow you to pre-pay a full year of real estate tax in advance. Maybe you'll want to investigate that as a way to increase your 2016 deductions. Just keep in mind you won't be able to take these deductions again in 2017 (unless you prepay 2018 in 2017).
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DSInvestor
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by DSInvestor » Sun Nov 20, 2016 6:24 pm

Are you doubling up your charitable donations in 2016 as well?
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bsteiner
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by bsteiner » Sun Nov 20, 2016 8:01 pm

NorCalDad wrote:I'd like to pay as much of my state/local 2017 taxes by the end of this year for deduction purposes. ...
Would a payment in excess of a good faith estimate of your 2016 tax be deductible?

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CAsage
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by CAsage » Sun Nov 20, 2016 8:13 pm

I will add that the FTB.CA.GOV website provides a selection to designate online payments for the 2017 tax year.
(Edited to remove all opinions, and just leave that note).
Last edited by CAsage on Tue Nov 22, 2016 11:40 am, edited 1 time in total.
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by Gill » Sun Nov 20, 2016 9:08 pm

bsteiner wrote:
NorCalDad wrote:I'd like to pay as much of my state/local 2017 taxes by the end of this year for deduction purposes. ...
Would a payment in excess of a good faith estimate of your 2016 tax be deductible?
I think I'm being set up, Bruce, but I don't know of anything denying the deduction. However, I do recall something about "substantial distortion of income" that could limit the deduction. :happy
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by letsgobobby » Mon Nov 21, 2016 1:00 am

DSInvestor wrote:Are you doubling up your charitable donations in 2016 as well?
I'm not the OP, but I am giving it serious thought. However, it would increase the annual fee in our Fido DAF for about 1 year so that has to be offset against any possible gain.

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by bsteiner » Mon Nov 21, 2016 10:40 am

Gill wrote:
bsteiner wrote:
NorCalDad wrote:I'd like to pay as much of my state/local 2017 taxes by the end of this year for deduction purposes. ...
Would a payment in excess of a good faith estimate of your 2016 tax be deductible?
I think I'm being set up, Bruce, but I don't know of anything denying the deduction. However, I do recall something about "substantial distortion of income" that could limit the deduction.
See Revenue Ruling 82-208, 1982-2 C.B. 58.

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by Gill » Mon Nov 21, 2016 6:54 pm

Thanks, Bruce. I suspected there had to be some sort of reasonable test.
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sport
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by sport » Mon Nov 21, 2016 7:03 pm

If you are deducting mortgage interest, I believe you can make your January payment in December and thereby deduct 13 months of interest payments.

Gill
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by Gill » Mon Nov 21, 2016 7:05 pm

sport wrote:If you are deducting mortgage interest, I believe you can make your January payment in December and thereby deduct 13 months of interest payments.
That's correct. But you only get a benefit once.
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mikep
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by mikep » Mon Nov 21, 2016 7:08 pm

Schedule A instructions for line 5 only indicate current or prior years are deductible in the example.. I would be cautious of future years and trying to defend that if audited.

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by basspond » Tue Nov 22, 2016 7:09 am

sport wrote:If you are deducting mortgage interest, I believe you can make your January payment in December and thereby deduct 13 months of interest payments.
I did that and the mortgage company only showed 12 months. In my case they went by the original amortization table. Didn't matter much, interest at the time I did this was only about $100. It doesn't pay if your interest portion of your payments is over several thousand a year(if you are doubling up one year and taking the standard deduction the next year).

Chip
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by Chip » Tue Nov 22, 2016 9:34 am

mikep wrote:Schedule A instructions for line 5 only indicate current or prior years are deductible in the example.. I would be cautious of future years and trying to defend that if audited.
I don't read the instructions that way at all. The paragraph I see as relevant is:

[You may deduct] State and local estimated tax payments made during 2015, including any part of a prior year refund that you chose to have credited to your 2015 state or local income taxes.

The first part doesn't say anything about which year those taxes apply to, only that they are PAID in the current tax year.

I have prepaid entire year state income taxes several times. Never heard a peep from the IRS. The only problem I've had is getting the state to credit the prepayment to the proper tax year. And getting them to cash the check in a timely manner.

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by pshonore » Tue Nov 22, 2016 9:52 am

Chip wrote:
mikep wrote:Schedule A instructions for line 5 only indicate current or prior years are deductible in the example.. I would be cautious of future years and trying to defend that if audited.
I don't read the instructions that way at all. The paragraph I see as relevant is:

[You may deduct] State and local estimated tax payments made during 2015, including any part of a prior year refund that you chose to have credited to your 2015 state or local income taxes.

The first part doesn't say anything about which year those taxes apply to, only that they are PAID in the current tax year.

I have prepaid entire year state income taxes several times. Never heard a peep from the IRS. The only problem I've had is getting the state to credit the prepayment to the proper tax year. And getting them to cash the check in a timely manner.
There are a lot of things people do that the IRS doesn't catch. Does this mean its ok? Of course not, it just means the IRS did not examine your return in detail. In order to be deductible, a tax must be imposed on the taxpayer. Since you haven't earned the income yet, how can the tax be imposed? Why stop with 2017 taxes? why not deduct 2018 and 2019 state taxes?

mikep
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by mikep » Tue Nov 22, 2016 9:57 am

pshonore wrote:
Chip wrote:
mikep wrote:Schedule A instructions for line 5 only indicate current or prior years are deductible in the example.. I would be cautious of future years and trying to defend that if audited.
I don't read the instructions that way at all. The paragraph I see as relevant is:

[You may deduct] State and local estimated tax payments made during 2015, including any part of a prior year refund that you chose to have credited to your 2015 state or local income taxes.

The first part doesn't say anything about which year those taxes apply to, only that they are PAID in the current tax year.

I have prepaid entire year state income taxes several times. Never heard a peep from the IRS. The only problem I've had is getting the state to credit the prepayment to the proper tax year. And getting them to cash the check in a timely manner.
There are a lot of things people do that the IRS doesn't catch. Does this mean its ok? Of course not, it just means the IRS did not examine your return in detail. In order to be deductible, a tax must be imposed on the taxpayer. Since you haven't earned the income yet, how can the tax be imposed? Why stop with 2017 taxes? why not deduct 2018 and 2019 state taxes?
This is what I see. Nowhere in this example is a state estimated tax payment for a future year (this example is from the 2015 instructions).
State and local income taxes withheld from your salary during 2015. Your Form(s) W-2 will show these amounts. Forms W-2G, 1099-G, 1099-R, and 1099-MISC may also show state and local income taxes withheld.

State and local income taxes paid in 2015 for a prior year, such as taxes paid with your 2014 state or local income tax return. Don't include penalties or interest.

State and local estimated tax payments made during 2015, including any part of a prior year refund that you chose to have credited to your 2015 state or local income taxes.

Mandatory contributions you made to the California, New Jersey, or New York Nonoccupational Disability Benefit Fund, Rhode Island Temporary Disability Benefit Fund, or Washington State Supplemental Workmen's Compensation Fund. Mandatory contributions to the Alaska, California, New Jersey, or Pennsylvania state unemployment fund.

Mandatory contributions to state family leave programs, such as the New Jersey Family Leave Insurance (FLI) program and the California Paid Family Leave program.

Don't reduce your deduction by any: State or local income tax refund or credit you expect to receive for 2015, or Refund of, or credit for, prior year state and local income taxes you actually received in 2015. Instead, see the instructions for Form 1040, line 10.

Chip
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by Chip » Tue Nov 22, 2016 10:09 am

pshonore wrote: There are a lot of things people do that the IRS doesn't catch. Does this mean its ok? Of course not, it just means the IRS did not examine your return in detail. In order to be deductible, a tax must be imposed on the taxpayer. Since you haven't earned the income yet, how can the tax be imposed? Why stop with 2017 taxes? why not deduct 2018 and 2019 state taxes?
Your point about the IRS not catching things is well taken.

I do have a reasonable expectation of those taxes being imposed as I have a good faith estimate of my income. By your reasoning, should I avoid making a state estimated payment on 12/15 to cover the taxes on a Roth conversion I plan to make on 12/20? And do you believe that prepaid property taxes cannot legally be deducted?

opus360
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by opus360 » Tue Nov 22, 2016 10:20 am

NorCalDad wrote:I'd like to pay as much of my state/local 2017 taxes by the end of this year for deduction purposes. I won't say exactly why, other than I believe it to be optimal tax planning for our household. I'm already planning to pay our 2017 spring property tax installment before Dec. 31, which our county allows.

Are there other ways to front-load state/local taxes in California?
Others have replied already about state/local taxes. I would also pay your January 2017 mortgage in very late December 2016 to claim the interest deduction of January 2017 in tax year 2016.

Chip
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Re: Prepaying 2017 state/local taxes before end of 2016

Post by Chip » Tue Nov 22, 2016 10:40 am

mikep wrote: State and local estimated tax payments made during 2015, including any part of a prior year refund that you chose to have credited to your 2015 state or local income taxes.
The part in italics is what I'm referring to; it doesn't specify that the payments have to be for current year taxes. Neither does the tax code (26 U.S. Code § 164).

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by pshonore » Tue Nov 22, 2016 10:41 am

Chip wrote:
pshonore wrote: There are a lot of things people do that the IRS doesn't catch. Does this mean its ok? Of course not, it just means the IRS did not examine your return in detail. In order to be deductible, a tax must be imposed on the taxpayer. Since you haven't earned the income yet, how can the tax be imposed? Why stop with 2017 taxes? why not deduct 2018 and 2019 state taxes?
Your point about the IRS not catching things is well taken.

I do have a reasonable expectation of those taxes being imposed as I have a good faith estimate of my income. By your reasoning, should I avoid making a state estimated payment on 12/15 to cover the taxes on a Roth conversion I plan to make on 12/20? And do you believe that prepaid property taxes cannot legally be deducted?
I believe taxes that apply to the current year income can be paid at any time during that year or the next (as an example the 4th quarter estimated state tax for 2016 can be made in December 2016 or January 2017). My 2016 property taxes are billed in July 2016 and due in July and January 2017. I can therefore pay them in 2016 or 2017. I don't see how I can deduct the the July 2017 tax payment (which I won't receive until July 2017) in 2016. Actually this may all go away in the near future but we can't discuss that.

As another example of the IRS not catching things: there was study done of 1098 Mortgage Interest forms. The IRS determined there was large number (over 100K) of the forms where over 10K of mortgage interest was paid but for which no tax return was received that matched the SS#. Now some of those could be folks who were not required to file (living off assets with little reportable income) and some perhaps were filed under another SS#. That one is still being studied but Big Brother is definitely watching.

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by Chip » Tue Nov 22, 2016 11:22 am

pshonore wrote:I believe taxes that apply to the current year income can be paid at any time during that year or the next (as an example the 4th quarter estimated state tax for 2016 can be made in December 2016 or January 2017). My 2016 property taxes are billed in July 2016 and due in July and January 2017. I can therefore pay them in 2016 or 2017. I don't see how I can deduct the the July 2017 tax payment (which I won't receive until July 2017) in 2016. Actually this may all go away in the near future but we can't discuss that.
I guess it really hinges on what Congress meant by the word "imposed" when they wrote the tax law. You seem (correct me if I'm wrong) to feel that it means the tax must for the current (or prior) tax year. I take it to mean that the tax exists and it applies to me.

I have searched unsuccessfully for any IRS rulings on this matter. Are you aware of any rulings where a deduction for state income taxes for the next tax year was disallowed solely because it was for future taxes?

My property taxes are billed in arrears. 2016 taxes will be due in 2/17 and 7/17. As of right now the tax office doesn't even know what the amount will be. But they almost always get the number by 12/31. So in my bunching years, I head down to the tax office right at the end of the year and pay. But one year they didn't get the number by the end of the year. But they were happy to take my estimated property tax payment of X, which I deducted. Turns out X was a little too much, so I received a refund a few months later, which I declared as income. Do you think I was legally in the wrong to deduct that payment?

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by sport » Tue Nov 22, 2016 12:05 pm

Chip wrote: So in my bunching years, I head down to the tax office right at the end of the year and pay.
My county has arranged with a bank to pay real estate taxes on line with no fee. It saves a trip downtown. Perhaps your county does something similar.

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by Chip » Tue Nov 22, 2016 2:32 pm

sport wrote:My county has arranged with a bank to pay real estate taxes on line with no fee. It saves a trip downtown. Perhaps your county does something similar.
Thanks for the tip! Turns out my county uses Official Payments Corp to handle online payments. It appears that they don't care what the bill amount is, you just tell them how much you're going to pay. It's $2 to process an e-check, which is more than worth it since it appears they supply a digital receipt. I'll probably use them next time around.

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Re: Prepaying 2017 state/local taxes before end of 2016

Post by LadyGeek » Tue Nov 22, 2016 4:38 pm

Several off-topic posts regarding proposed legislation (what "might" happen with next year's tax rates) were removed.

Please see this post for a detailed explanation: Political comments remain off-topic

The relevant part is to "keep investors from making bad decisions. Proposed regulations change many times between the time they're introduced and signed into law."
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