Prepayment of SALT Taxes? [State and Local]

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jjj88
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Prepayment of SALT Taxes? [State and Local]

Post by jjj88 » Mon Dec 04, 2017 7:09 pm

I'm a first time poster and see that speculating on the proposed tax plan is not allowed in this forum because it is not actionable, however my question is related to the actionable strategy of prepaying SALT taxes this year. I hope I am not violating forum rules. I've seen articles that suggest prepaying property taxes this year (in municipalities that allow prepayments), but I have not seen any mention of prepaying SALT taxes. My question - is it possible to prepay estimated 2018 SALT taxes this year? i.e. will I be able to deduct the full amount of any prepayments against my 2017 federal income taxes and then also get to use the repayments as credits against my SALT taxes as they come due next year? Or will any prepayment of estimated 2018 SALT taxes just be deemed an overpayment of 2017 SALT taxes which will then be refunded to me in 2018 and the refunded amount will be taxed as income in 2018? The former seems like an attractive option to me, the latter not so much. Any thoughts would be much appreciated, thank!

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Re: Prepayment of SALT Taxes? [State and Local]

Post by LadyGeek » Mon Dec 04, 2017 8:07 pm

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Chip » Tue Dec 05, 2017 7:07 am

jjj88 wrote:
Mon Dec 04, 2017 7:09 pm
I've seen articles that suggest prepaying property taxes this year (in municipalities that allow prepayments), but I have not seen any mention of prepaying SALT taxes. My question - is it possible to prepay estimated 2018 SALT taxes this year? i.e. will I be able to deduct the full amount of any prepayments against my 2017 federal income taxes and then also get to use the repayments as credits against my SALT taxes as they come due next year? Or will any prepayment of estimated 2018 SALT taxes just be deemed an overpayment of 2017 SALT taxes which will then be refunded to me in 2018 and the refunded amount will be taxed as income in 2018? The former seems like an attractive option to me, the latter not so much. Any thoughts would be much appreciated, thank!
Hi, and welcome!

There has actually been a fair amount of discussion about this here over the years. You can look at many of those threads by searching on "bunching deductions".

There's a recent thread where prepaying was discussed, starting about here.

I have prepaid state income taxes for years in the manner you described. My plan for this year, like other years, is to pay my estimated state taxes for 2018 by the end of this month. My state often does not have the appropriate estimated tax form available. In those cases I have created one by hand. I have learned to send the payment via certified mail, return receipt. This is a completely separate payment from my 4th quarter 2017 estimated payment.

If you are successful in getting your state to credit it to your 2018 estimated taxes it will not be an overpayment for 2017 and will be a credit towards your 2018 state tax liability. If you pay it in 2017 it is a deduction on your 2017 federal income taxes.

You should be aware that there are several posters here, who understand taxes well, who believe that this sort of prepayment isn't okay because the tax liability for 2018 doesn't exist at the end of 2017. I haven't seen anything definitive yet from the IRS. There are some rulings that could be extrapolated to say it's not okay. I'm interpreting the ruling referenced in the above thread to mean that paying estimated taxes on my good faith estimate of my 2018 liability is okay.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by mcraepat9 » Tue Dec 05, 2017 12:33 pm

Chip wrote:
Tue Dec 05, 2017 7:07 am
jjj88 wrote:
Mon Dec 04, 2017 7:09 pm
I've seen articles that suggest prepaying property taxes this year (in municipalities that allow prepayments), but I have not seen any mention of prepaying SALT taxes. My question - is it possible to prepay estimated 2018 SALT taxes this year? i.e. will I be able to deduct the full amount of any prepayments against my 2017 federal income taxes and then also get to use the repayments as credits against my SALT taxes as they come due next year? Or will any prepayment of estimated 2018 SALT taxes just be deemed an overpayment of 2017 SALT taxes which will then be refunded to me in 2018 and the refunded amount will be taxed as income in 2018? The former seems like an attractive option to me, the latter not so much. Any thoughts would be much appreciated, thank!
Hi, and welcome!

There has actually been a fair amount of discussion about this here over the years. You can look at many of those threads by searching on "bunching deductions".

There's a recent thread where prepaying was discussed, starting about here.

I have prepaid state income taxes for years in the manner you described. My plan for this year, like other years, is to pay my estimated state taxes for 2018 by the end of this month. My state often does not have the appropriate estimated tax form available. In those cases I have created one by hand. I have learned to send the payment via certified mail, return receipt. This is a completely separate payment from my 4th quarter 2017 estimated payment.

If you are successful in getting your state to credit it to your 2018 estimated taxes it will not be an overpayment for 2017 and will be a credit towards your 2018 state tax liability. If you pay it in 2017 it is a deduction on your 2017 federal income taxes.

You should be aware that there are several posters here, who understand taxes well, who believe that this sort of prepayment isn't okay because the tax liability for 2018 doesn't exist at the end of 2017. I haven't seen anything definitive yet from the IRS. There are some rulings that could be extrapolated to say it's not okay. I'm interpreting the ruling referenced in the above thread to mean that paying estimated taxes on my good faith estimate of my 2018 liability is okay.
For what it's worth, I was poking around the New York State Department of Taxation and Finance website and online features, and it seemed to let me prepay estimated NYS and NYC income taxes through Q3 2018.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Chip » Tue Dec 05, 2017 12:44 pm

mcraepat9 wrote:
Tue Dec 05, 2017 12:33 pm
For what it's worth, I was poking around the New York State Department of Taxation and Finance website and online features, and it seemed to let me prepay estimated NYS and NYC income taxes through Q3 2018.
Thanks for that information. Someone else here mentioned in late 2016 that the CA online payment system was allowing 2017 estimated payments. I checked my state's system this morning and it is still a no go.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by CAsage » Tue Dec 05, 2017 2:29 pm

I can personally vouch that the CA Franchise Tax Board online payment systems for estimated taxes allows you to choose which tax year it applies to, and that includes 2018. Tragically AMT limits how much some can pay... but I paid every 2018 penny I could. Massive Charitable Donor Funding helps lower AMT, so one could deduct more state taxes (and have that affect federal taxes).

I plan (based on reading other Boglehead threads) to deduct all of that this year on my federal 1040, and omit the 2018 from my state 540.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by testing321 » Tue Dec 05, 2017 2:30 pm

The due dates for my estimated state tax are the same as for federal tax. I plan to pay my payment for the 4th quarter estimated state tax (due Jan 16) this month so that it can be deducted on my 2017 federal return. I will make a very generous estimate of my state taxes due.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by hlfo718 » Tue Dec 05, 2017 2:36 pm

Hi Mcraepat9,

Which form is for 2018 NYS estimated payment? I see only 2017 forms on the website.

Thanks

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Re: Prepayment of SALT Taxes? [State and Local]

Post by jebmke » Tue Dec 05, 2017 2:38 pm

I only have space in the 15% marginal rate. A DAF donation gets me the 15% at the Federal level and ~7.4% at the state level. Paying state taxes ahead only gets me the 15% rate for 2018 taxes. For 2017 state taxes it is probably a wash at best due to the marginal rate on the refund in 2018. I'll probably blast the DAF, take the 22.4% (less the Federal impact on the lower state taxes) and call it a day. Doing the DAF gives me a mini re-balance since my DAF is in bonds.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by pshonore » Tue Dec 05, 2017 3:02 pm

testing321 wrote:
Tue Dec 05, 2017 2:30 pm
The due dates for my estimated state tax are the same as for federal tax. I plan to pay my payment for the 4th quarter estimated state tax (due Jan 16) this month so that it can be deducted on my 2017 federal return. I will make a very generous estimate of my state taxes due.
All that "making a generous estimate" will do is increase your refund which will then be taxable next year. You have to think of some legal way to pay the tax and have it not show up on your 2017 state return as a payment

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Re: Prepayment of SALT Taxes? [State and Local]

Post by mcraepat9 » Tue Dec 05, 2017 3:09 pm

hlfo718 wrote:
Tue Dec 05, 2017 2:36 pm
Hi Mcraepat9,

Which form is for 2018 NYS estimated payment? I see only 2017 forms on the website.

Thanks
PDF forms not available yet - if you have an account with NYS DTF (if you don't, create one) and then try to make an estimated tax payment. It will show you are able to pay through Q3 2018.

On the front page after login, click "Make a payment".
On next page, on the drawdown, click "Pay estimated tax"
On next page, you can select quarters in 2018 through Q3 it seems.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by CAsage » Tue Dec 05, 2017 3:18 pm

pshonore wrote:
Tue Dec 05, 2017 3:02 pm
All that "making a generous estimate" will do is increase your refund which will then be taxable next year. You have to think of some legal way to pay the tax and have it not show up on your 2017 state return as a payment
Disagree. According to the CA 540 form Line 72 instructions, for this year's return (and I'm looking at the 2016 instructions), one only includes the CURRENT YEAR estimated taxes. So, those 2018 pre-payments that I just made will NOT BE MENTIONED on my 540 return (just the federal). Perhaps this is a gray area, but I don't see anything that precludes it. Check back in a couple years!

Line 72 – 2016 CA Estimated Tax and Other Payments Enter the total of any: Any California estimated tax payments you made using 2016 Form 540-ES, electronic funds withdrawal, Web Pay, or credit card. Any Overpayment from your 2015 California income tax return that you applied to your 2016 estimated tax. Any Payment you sent with form FTB 3519, Payment for Automatic Extension for Individuals. Any California estimated tax payments made on your behalf by an estate, trust, or S corporation on Schedule K-1 (541) or Schedule K-1 (100S).
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Re: Prepayment of SALT Taxes? [State and Local]

Post by mcraepat9 » Tue Dec 05, 2017 3:20 pm

CAsage wrote:
Tue Dec 05, 2017 2:29 pm
I can personally vouch that the CA Franchise Tax Board online payment systems for estimated taxes allows you to choose which tax year it applies to, and that includes 2018. Tragically AMT limits how much some can pay... but I paid every 2018 penny I could. Massive Charitable Donor Funding helps lower AMT, so one could deduct more state taxes (and have that affect federal taxes).

I plan (based on reading other Boglehead threads) to deduct all of that this year on my federal 1040, and omit the 2018 from my state 540.
I am also in AMT land (due solely to SALT income taxes), but trying to find out whether this prepayment option would help. Other than messing around with "forms view" in TurboTax, have you come up with a decent way of testing whether prepaying does anything for people like me?
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Re: Prepayment of SALT Taxes? [State and Local]

Post by CAsage » Tue Dec 05, 2017 3:33 pm

TurboTax (or equivalent) is the safest way. After sitting in front of my computer (bless Excel) for an evening or two.... I modeled my taxes using last year's form to add income lines, subtract my deductions, and then exactly duplicated the formulas for calculating the AMT that applied to me (very few lines of the two page form). I found it easier to modify amounts in the "excel' version of my taxes than having to enter things in Taxcut (find the line, change the amount, hit next 12 times etc). I won't say it's trivially easy, but the AMT formulas (that apply to me) were pretty simple - AGI plus all taxes on my Schedule A, a couple subtractions and multiplying by .26. If you are Excel handy...

Anyhow, what I found is that if I made enough of a Charitable donation to get my AGI below $120,700, then I could deduct more SALT and property taxes. Best I could do. So my charity is now earmarked for .... a while. Please note that I am merely a number-happy engineer, not a tax guru (and those numbers are for single, married numbers are higher).
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Re: Prepayment of SALT Taxes? [State and Local]

Post by pshonore » Tue Dec 05, 2017 4:22 pm

CAsage wrote:
Tue Dec 05, 2017 3:18 pm
pshonore wrote:
Tue Dec 05, 2017 3:02 pm
All that "making a generous estimate" will do is increase your refund which will then be taxable next year. You have to think of some legal way to pay the tax and have it not show up on your 2017 state return as a payment
Disagree. According to the CA 540 form Line 72 instructions, for this year's return (and I'm looking at the 2016 instructions), one only includes the CURRENT YEAR estimated taxes. So, those 2018 pre-payments that I just made will NOT BE MENTIONED on my 540 return (just the federal). Perhaps this is a gray area, but I don't see anything that precludes it. Check back in a couple years!

Line 72 – 2016 CA Estimated Tax and Other Payments Enter the total of any: Any California estimated tax payments you made using 2016 Form 540-ES, electronic funds withdrawal, Web Pay, or credit card. Any Overpayment from your 2015 California income tax return that you applied to your 2016 estimated tax. Any Payment you sent with form FTB 3519, Payment for Automatic Extension for Individuals. Any California estimated tax payments made on your behalf by an estate, trust, or S corporation on Schedule K-1 (541) or Schedule K-1 (100S).
You've probably got a problem if you're using commercial software and you try to override the amount of state tax paid on your State return to not equal the amount on your federal return. That just means a manual state return I guess. My post referred to someone overpaying their 2017 State estimated tax on purpose. That's a wash.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by CAsage » Tue Dec 05, 2017 6:32 pm

pshonore wrote:
Tue Dec 05, 2017 4:22 pm
You've probably got a problem if you're using commercial software and you try to override the amount of state tax paid on your State return to not equal the amount on your federal return. That just means a manual state return I guess. My post referred to someone overpaying their 2017 State estimated tax on purpose. That's a wash.
That's quite possible. Since I'm too cheap to file the state electronically and have to attach my Federal return, I will force it. State Taxcut is not available until January, so I can't play with it yet.... And I agree, in most cases it's a wash. I have not found "bunching" my deductions to be helpful in the past, but of course with one-year-only Charitable Mega donation, this is different.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by strafe » Tue Dec 05, 2017 6:40 pm

I'm nearly certain that the federal tax treatment of a SALT refund depends on whether those taxes were deducted in the prior year. If you deduct SALT on 2017 tax return, any refund issued in 2018 would be considered an addition to income for 2018 (irrespective of whether you take standard deduction or itemize in 2018 tax year).

You'd benefit if your marginal tax rate in 2018 were lower than in 2017. Otherwise, prepayment would come back to bite you.

Prepaying your 2018 property taxes in 2017 might be a different story, assuming they are not refunded, and you are planning to take the standard deduction in 2017.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by jebmke » Tue Dec 05, 2017 6:47 pm

strafe wrote:
Tue Dec 05, 2017 6:40 pm
I'm nearly certain that the federal tax treatment of a SALT refund depends on whether those taxes were deducted in the prior year. If you deduct SALT on 2017 tax return, any refund issued in 2018 would be considered an addition to income for 2018 (irrespective of whether you take standard deduction or itemize in 2018 tax year).
It also depends on the extent to which the deduction in 2017 created a benefit. In some cases, there is no or partial benefit even if you include the state tax on your Schedule A. There are a couple of worksheets buried in the IRS pubs that take you through the calculation.

Or you can use this handy online calculator.

http://cotaxaide.org/tools/Refund%20Calculator.html
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Ged » Tue Dec 05, 2017 6:52 pm

I prepaid my real estate tax the year prior to my retirement as well as making a donation to the Fidelity DAF.

The strategy worked well on my federal taxes however NJ does not allow pulling forward real estate taxes and I eventually had to make an additional payment on my state taxes.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Good Listener » Tue Dec 05, 2017 7:06 pm

Prepaying state and local INCOME taxes is a wash or a negative. Because you will then pay on the refund when you file your 2018 taxes and it will increase your AGI next year but not reduce it this year. And even if SALT is gotten rid of effective Jan 1, 2018, I assume one will have to pay taxes on the refund if you took the deduction this year.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by harmony » Tue Dec 05, 2017 9:50 pm

If you want to reduce 2017 state taxes and if you are a resident of one of the six states which allows you to deduct federal taxes on your state return and you need to pay U.S. estimated taxes; make sure that you pay those estimated taxes in 2017 yet, rather than waiting until Jan. 15, 2018. What you pay in 2017 you can deduct on your 2017 state return. This would work well if you received some unexpected taxable income (i.e. inheritance or self-employment earnings) in 2017 thus putting you in higher U.S. and state brackets. By making sure to prepay your estimated state taxes before the end of the year, you ensure that you can deduct them on your 2017 state taxes. (Rules for this may vary among six states. In my state taxpayers like to do this to offset high state taxes.)

https://www.thebalance.com/deducting-fe ... rn-3193248

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Chip » Wed Dec 06, 2017 3:32 am

strafe wrote:
Tue Dec 05, 2017 6:40 pm
I'm nearly certain that the federal tax treatment of a SALT refund depends on whether those taxes were deducted in the prior year. If you deduct SALT on 2017 tax return, any refund issued in 2018 would be considered an addition to income for 2018 (irrespective of whether you take standard deduction or itemize in 2018 tax year).
This isn't relevant to the OP's question. The OP wants to prepay 2018 estimated state income taxes in 2017, as well as 2017 state income taxes. This creates a "double" federal deduction in 2017. If the prepayment for 2018 ends up being less than or equal to the ultimate 2018 liability, there will be no state refund.

Any overpayment of the 2018 state taxes in 2017 would create a refund in 2019. As you said, it would be taxable, subject to the caveats noted by jebmke.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Thesaints » Wed Dec 06, 2017 6:26 pm

What if I pay the 4th installment of my 2017 CA taxes before DEC31 and select a suitably high amount ?
This will be included to my itemized deductions on Schedule A lowering my taxes for 2017.
It will also appear as a corresponding refund of state taxes on my 2018 filing increasing my liability for next year.

If my federal marginal rate in 2017 is higher than in 2018 I win.
Of course, a thorough calculation would take into account missed interest on the sum prepaid, but interest rates are quite low at present.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by CAsage » Wed Dec 06, 2017 7:34 pm

I have overpaid (somewhat by accident) my 2017 SALT. And I deliberately paid about 60% of my 2018 SALT this month in order to deduct it all in 2017. I am a 'cash' taxpayer, and pay taxes on what goes in and out in each year. I will DEDUCT every penny I paid in 2017 and 2018 estimated taxes on my 2017 Federal refund. For my Golden State CA 2017 return, I will report all the 2017 estimated taxes (line 72) which should well cover what I end up actually owing for this year. There will be a surplus due to a modest overpayment, which I will designate on Line 95 for the lovely folks in Sacramento to APPLY TO MY 2018 estimated taxes.

Therefore, there will be no refund of my SALT taxes back to me. I really don't understand other views that seem to think this is a wash, as I certainly don't get a refund. I don't believe an "overpayment' is the same as a refund. Note that I would not have had the 2017 overpayment if it was not for my recent massive Charitable Donor Advised Fund, which I just opened.... Sigh. Also note that "bunching" deductions in alternate years is a tried and true tax strategy - I'm just following along.

Edited to add: it appears unavoidable to get surplus 2017 estimated taxes refunded as income in 2018; the 2018 estimated taxes are good.
Last edited by CAsage on Wed Dec 06, 2017 10:25 pm, edited 1 time in total.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by CAsage » Wed Dec 06, 2017 7:35 pm

Thesaints wrote:
Wed Dec 06, 2017 6:26 pm
It will also appear as a corresponding refund of state taxes on my 2018 filing increasing my liability for next year.
Rather than a refund (bad, avoid) how about just designating that to be applied to your 2018 estimated taxes? The IRS does not get a copy of my state tax return, though the state does seem to want the IRS forms.....

Edit: I stand corrected below; excess 2017 taxes WILL result in a 1099-G for 2018 regardless of whether you take them in cash refund or apply them .
Last edited by CAsage on Wed Dec 06, 2017 10:24 pm, edited 3 times in total.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Thesaints » Wed Dec 06, 2017 7:37 pm

CAsage wrote:
Wed Dec 06, 2017 7:35 pm
Thesaints wrote:
Wed Dec 06, 2017 6:26 pm
It will also appear as a corresponding refund of state taxes on my 2018 filing increasing my liability for next year.
Rather than a refund (bad, avoid) how about just designating that to be applied to your 2018 estimated taxes? The IRS does not get a copy of my state tax return, though the state does seem to want the IRS forms.....
Totally! I had thought about that, but now we have to factor in 2 years worth of interests
(fair assessment would be the 2-year treasury rate in force, 1.78% at present, IMO)
Another option could be increasing state exemptions for the year.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by pshonore » Wed Dec 06, 2017 8:28 pm

CAsage wrote:
Wed Dec 06, 2017 7:34 pm
I have overpaid (somewhat by accident) my 2017 SALT. And I deliberately paid about 60% of my 2018 SALT this month in order to deduct it all in 2017. I am a 'cash' taxpayer, and pay taxes on what goes in and out in each year. I will DEDUCT every penny I paid in 2017 and 2018 estimated taxes on my 2017 Federal refund. For my Golden State CA 2017 return, I will report all the 2017 estimated taxes (line 72) which should well cover what I end up actually owing for this year. There will be a surplus due to a modest overpayment, which I will designate on Line 95 for the lovely folks in Sacramento to APPLY TO MY 2018 estimated taxes.

Therefore, there will be no refund of my SALT taxes back to me. I really don't understand other views that seem to think this is a wash, as I certainly don't get a refund. I don't believe an "overpayment' is the same as a refund. Note that I would not have had the 2017 overpayment if it was not for my recent massive Charitable Donor Advised Fund, which I just opened.... Sigh. Also note that "bunching" deductions in alternate years is a tried and true tax strategy - I'm just following along.
If CA allows 2018 payments in 2017 and tracks them separately, I would tend to agree. However I believe Connecticut treats all payments received in 2017 as payments for 2017 (unless I specify an earlier year like the 1/15/17 payment which I can direct to 2016) and if there is a refund, it will be taxable on the 2018 Federal return. Remember if your "number" for total taxes paid does not equal their "number", they use theirs and refund the excess or bill accordingly. I don't have a problem with bunching property taxes if they are billed. Mine are billed in July; 1/2 due in July and 1/2 due the following January. That means is one year I pay in January, July and December; the next year I pay in July. and then repeat the cycle.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by pshonore » Wed Dec 06, 2017 8:31 pm

Thesaints wrote:
Wed Dec 06, 2017 7:37 pm
CAsage wrote:
Wed Dec 06, 2017 7:35 pm
Thesaints wrote:
Wed Dec 06, 2017 6:26 pm
It will also appear as a corresponding refund of state taxes on my 2018 filing increasing my liability for next year.
Rather than a refund (bad, avoid) how about just designating that to be applied to your 2018 estimated taxes? The IRS does not get a copy of my state tax return, though the state does seem to want the IRS forms.....
Totally! I had thought about that, but now we have to factor in 2 years worth of interests
(fair assessment would be the 2-year treasury rate in force, 1.78% at present, IMO)
Another option could be increasing state exemptions for the year.
Whether you take it in cash, or apply it, it still counts a refund and is taxable the next tax year. The IRS will get a copy of the 1099G that the State sends showing the refund.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by harmony » Wed Dec 06, 2017 8:33 pm

If you are thinking about paying your estimated state taxes before the last day of 2017, you may want to check out whether you would be filing your state taxes as MFJ or MFS. If filing separately (at least this is the case in my state) I was informed today that:
Each spouse stands alone on their state estimates and cannot rely on the spouse’s estimated payments.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Leesbro63 » Wed Dec 06, 2017 8:38 pm

I've been following this thread closely. It sounds like there are two issues here:

1. Will the state apply a payment received in 2017 toward 2018, or will it just add it to the 2017 ledger? It would seem that if they don't apply to 2018, the only "harm" will be that it will show up as refunded in 2018 and will be taxable income in 2018. In that case, all you've really lost is the short term use of your money.

2. The bigger, real issue is this: Is deducting from Federal income a state income tax payment made in 2017 toward tax year 2018 legal/proper/OK? Absent direct publication or clear tax case law, it would seem to be a reasonable and legal gamble to prepay 2018 state income tax in 2017 if you are fairly certain that your state will apply it correctly to tax year 2018.

Did I correctly summarize this? And what is the answer to number 2?

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Thesaints » Wed Dec 06, 2017 8:43 pm

What difference does it make if one prepays 2018, or overpays 2017 ?
As long as it is done before 12/31 it is itemized against the 2017 taxes.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by abuss368 » Wed Dec 06, 2017 8:44 pm

Make sure you are not subject to AMT as it will be backed out.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Leesbro63 » Wed Dec 06, 2017 8:53 pm

Thesaints wrote:
Wed Dec 06, 2017 8:43 pm
What difference does it make if one prepays 2018, or overpays 2017 ?
As long as it is done before 12/31 it is itemized against the 2017 taxes.
Big difference. Because a 2017 overpayment will generate a form 1099-R as income taxable in 2018. Negating the deduction you took for it in 2017. If applied directly to 2018, however, this won't happen and your deduction for state income tax in 2017 won't be undone. I can't discuss pending legislation, but getting a federal deduction for 2018 state income taxes paid in 2017, that doesn't get "undone" by becoming taxable income in 2018, could make a lot of sense.
Last edited by Leesbro63 on Wed Dec 06, 2017 8:55 pm, edited 1 time in total.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Thesaints » Wed Dec 06, 2017 8:55 pm

Leesbro63 wrote:
Wed Dec 06, 2017 8:53 pm
Thesaints wrote:
Wed Dec 06, 2017 8:43 pm
What difference does it make if one prepays 2018, or overpays 2017 ?
As long as it is done before 12/31 it is itemized against the 2017 taxes.
Big difference. Because a 2017 overpayment will generate a form 1099-R as income taxable in 2018. Negating the deduction you took for it in 2017. If applied directly to 2018, however, this won't happen and you're deduction for state income tax in 2017 won't be undone. I can't discuss pending legislation, but getting a federal deduction for 2018 state income taxes paid in 2017, that doesn't get "undone" by becoming taxable income in 2018, could make a lot of sense.
Got it. Thanks!

I can confirm CA allows to apply estimated payments to 2018 as we speak.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Peter Foley » Wed Dec 06, 2017 8:56 pm

When bunching deductions, for many individuals three items are fairly commmon:
1. Prepay next year's state income taxes due before December 31st (if your state has an income tax)
2. Prepay all or some of your next year's property tax (allowed in some states and municipalities)
3. Contribute more to charities (and contribute less in the next year)

These are long standing approaches for individuals who itemize in one year and take a standard deduction in the next year.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Leesbro63 » Wed Dec 06, 2017 8:56 pm

Good. So now the only question is if it's legal to deduct 2018 state income taxes prepaid in 2017 from Federal income.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Thesaints » Wed Dec 06, 2017 9:02 pm

From Schedule A Instructions
State and local estimated tax payments made during 2017, including any part of a prior year refund that you chose to have credited to your 2017 state or local income taxes.
I think the second part of the sentence refers only to "prior years refunds" and not to "estimated tax payments", which should be deductible regardless of the year they refer to.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Leesbro63 » Wed Dec 06, 2017 9:04 pm

Thesaints wrote:
Wed Dec 06, 2017 9:02 pm
From Schedule A Instructions
State and local estimated tax payments made during 2017, including any part of a prior year refund that you chose to have credited to your 2017 state or local income taxes.
I think the second part of the sentence refers only to "prior years refunds" and not to "estimated tax payments", which should be deductible regardless of the year they refer to.
So I THINK you are saying that the above means any state and local income taxes made during 2017, regardless of the tax year that the state applies them to, are Federally deductible. Right?

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Thesaints » Wed Dec 06, 2017 9:07 pm

Yes.
It makes sense, since property taxes are deductible in the year they are paid even when they become due in the following one.

What I'm considering is not only prepaying the entire tax amount (and decrease withholdings), but going over. It will depend on the brackets, but it should be a non brainer for new retirees, or those expecting substantially lower income for some reason.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by CAsage » Wed Dec 06, 2017 9:51 pm

Leesbro63 wrote:
Wed Dec 06, 2017 8:53 pm
Thesaints wrote:
Wed Dec 06, 2017 8:43 pm
What difference does it make if one prepays 2018, or overpays 2017 ?
As long as it is done before 12/31 it is itemized against the 2017 taxes.
Big difference. Because a 2017 overpayment will generate a form 1099-R as income taxable in 2018. Negating the deduction you took for it in 2017. If applied directly to 2018, however, this won't happen and your deduction for state income tax in 2017 won't be undone. I can't discuss pending legislation, but getting a federal deduction for 2018 state income taxes paid in 2017, that doesn't get "undone" by becoming taxable income in 2018, could make a lot of sense.
I am hoping my 2017 overpayment (due to unplanned massive charity) can be directly applied to my 2018 taxes - but if not, it's just a wash, and I'm not really worse off overall. I am sincerely hoping I don't get a 1099-G (isn't it a G, not R?) I feel very comfortable that my state will correctly allocate my 2018 designated dollars - I would have gone 100% 2018 except for AMT.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by grabiner » Wed Dec 06, 2017 9:55 pm

CAsage wrote:
Wed Dec 06, 2017 7:35 pm
Thesaints wrote:
Wed Dec 06, 2017 6:26 pm
It will also appear as a corresponding refund of state taxes on my 2018 filing increasing my liability for next year.
Rather than a refund (bad, avoid) how about just designating that to be applied to your 2018 estimated taxes? The IRS does not get a copy of my state tax return, though the state does seem to want the IRS forms.....
It's still taxed as a refund, because it represents an overpayment of tax for 2017. If you can deduct state tax payments in 2018, you can deduct this payment just as if you received the refund in cash and made a regular payment. But even if you do not deduct state payments in 2018, the refund you receive in 2018 on your 2017 tax is taxable because you deducted the payment in 2017.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by CAsage » Wed Dec 06, 2017 10:16 pm

grabiner wrote:
Wed Dec 06, 2017 9:55 pm
CAsage wrote:
Wed Dec 06, 2017 7:35 pm
Thesaints wrote:
Wed Dec 06, 2017 6:26 pm
It will also appear as a corresponding refund of state taxes on my 2018 filing increasing my liability for next year.
Rather than a refund (bad, avoid) how about just designating that to be applied to your 2018 estimated taxes? The IRS does not get a copy of my state tax return, though the state does seem to want the IRS forms.....
It's still taxed as a refund, because it represents an overpayment of tax for 2017. If you can deduct state tax payments in 2018, you can deduct this payment just as if you received the refund in cash and made a regular payment. But even if you do not deduct state payments in 2018, the refund you receive in 2018 on your 2017 tax is taxable because you deducted the payment in 2017.
I defer to your experience. Gosh darn it, I wish I could reduce my 2017 overpayment right now, but I don't see the "redesignate your extra bucks from 2017 to 2018" button. So it appears the designation of estimated taxes for 2018 is valid (and won't result in a taxable income in 2018), but the 2017 estimated taxes will. I copied the CA FTB text below:

Although you did not receive a California Personal Income Tax Refund, the amount in Box 2 of the Form 1099-G is considered to have been refunded to you whether your overpayment was:
Directly deposited into your bank account.
Offset for other liabilities such as tax, penalties and interest.
Credited towards estimated tax payments.
Intercepted by other state, city or county agencies or the IRS.
Donated as a Voluntary Contribution on your California Personal Income Tax Return.
Applied to a Use Tax payment.
Last edited by CAsage on Wed Dec 06, 2017 10:21 pm, edited 1 time in total.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by grabiner » Wed Dec 06, 2017 10:21 pm

CAsage wrote:
Wed Dec 06, 2017 10:16 pm
grabiner wrote:
Wed Dec 06, 2017 9:55 pm
CAsage wrote:
Wed Dec 06, 2017 7:35 pm
Thesaints wrote:
Wed Dec 06, 2017 6:26 pm
It will also appear as a corresponding refund of state taxes on my 2018 filing increasing my liability for next year.
Rather than a refund (bad, avoid) how about just designating that to be applied to your 2018 estimated taxes? The IRS does not get a copy of my state tax return, though the state does seem to want the IRS forms.....
It's still taxed as a refund, because it represents an overpayment of tax for 2017. If you can deduct state tax payments in 2018, you can deduct this payment just as if you received the refund in cash and made a regular payment. But even if you do not deduct state payments in 2018, the refund you receive in 2018 on your 2017 tax is taxable because you deducted the payment in 2017.
I defer to your experience. Gosh darn it, I wish I could reduce my 2017 overpayment right now, but I don't see the "redesignate your extra bucks from 2017 to 2018" button. The 2018 payment is still valid, though? In prior years, I have always tried to nail it as close to owing a little as I could, but am now bunching.
It's likely to be close to a wash if you deduct in 2017 and don't deduct in 2018. You get a 2017 deduction, and pay tax in 2018 on an amount equal to the deduction. (It could cost you if you run into some AGI-based phase-out; a $1000 tax refund costs you $50 in child tax credit if you are in that phase-out.)
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Re: Prepayment of SALT Taxes? [State and Local]

Post by jjj88 » Wed Dec 06, 2017 10:26 pm

Wow thanks for all of the thoughtful replies, this is a great community! I thought my potential strategy was going to be quickly dismissed, but it sounds like there is some debate on here and the rules may be state dependent. I’m going to check with some tax professionals in my state (NY) and will reply back with any good info I gather.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by DrGoogle2017 » Wed Dec 06, 2017 10:33 pm

CAsage wrote:
Wed Dec 06, 2017 7:34 pm
I have overpaid (somewhat by accident) my 2017 SALT. And I deliberately paid about 60% of my 2018 SALT this month in order to deduct it all in 2017. I am a 'cash' taxpayer, and pay taxes on what goes in and out in each year. I will DEDUCT every penny I paid in 2017 and 2018 estimated taxes on my 2017 Federal refund. For my Golden State CA 2017 return, I will report all the 2017 estimated taxes (line 72) which should well cover what I end up actually owing for this year. There will be a surplus due to a modest overpayment, which I will designate on Line 95 for the lovely folks in Sacramento to APPLY TO MY 2018 estimated taxes.

Therefore, there will be no refund of my SALT taxes back to me. I really don't understand other views that seem to think this is a wash, as I certainly don't get a refund. I don't believe an "overpayment' is the same as a refund. Note that I would not have had the 2017 overpayment if it was not for my recent massive Charitable Donor Advised Fund, which I just opened.... Sigh. Also note that "bunching" deductions in alternate years is a tried and true tax strategy - I'm just following along.

Edited to add: it appears unavoidable to get surplus 2017 estimated taxes refunded as income in 2018; the 2018 estimated taxes are good.
Good idea, I never thought of this strategy. Good thing I’m reading this thread. My conversion from IRA to Roth, I will owe lots of taxes.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Thesaints » Thu Dec 07, 2017 12:56 am

grabiner wrote:
Wed Dec 06, 2017 10:21 pm
CAsage wrote:
Wed Dec 06, 2017 10:16 pm
grabiner wrote:
Wed Dec 06, 2017 9:55 pm
CAsage wrote:
Wed Dec 06, 2017 7:35 pm
Thesaints wrote:
Wed Dec 06, 2017 6:26 pm
It will also appear as a corresponding refund of state taxes on my 2018 filing increasing my liability for next year.
Rather than a refund (bad, avoid) how about just designating that to be applied to your 2018 estimated taxes? The IRS does not get a copy of my state tax return, though the state does seem to want the IRS forms.....
It's still taxed as a refund, because it represents an overpayment of tax for 2017. If you can deduct state tax payments in 2018, you can deduct this payment just as if you received the refund in cash and made a regular payment. But even if you do not deduct state payments in 2018, the refund you receive in 2018 on your 2017 tax is taxable because you deducted the payment in 2017.
I defer to your experience. Gosh darn it, I wish I could reduce my 2017 overpayment right now, but I don't see the "redesignate your extra bucks from 2017 to 2018" button. The 2018 payment is still valid, though? In prior years, I have always tried to nail it as close to owing a little as I could, but am now bunching.
It's likely to be close to a wash if you deduct in 2017 and don't deduct in 2018. You get a 2017 deduction, and pay tax in 2018 on an amount equal to the deduction. (It could cost you if you run into some AGI-based phase-out; a $1000 tax refund costs you $50 in child tax credit if you are in that phase-out.)
Go on the ftb.ca website. Make an estimated payment of $10k for 2018 (you can choose 2018 on the pulldown menu). Those 10k can be itemized for 2017. Then decrease your CA withholdings with your employer (form DE 4) by 10k.
Throught 2018 you will pay 10k less in CA taxes, which are compensated by the 10k estimated payment made this year.
Et voila: 10k of state taxes due in 2018 have been itemized n 2017.
I’ve used 10k, but feel free to replace that a ount with whatever your estimate of 2018 CA taxes is.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Tanelorn » Thu Dec 07, 2017 2:06 am

Leesbro63 wrote:
Wed Dec 06, 2017 8:53 pm
Thesaints wrote:
Wed Dec 06, 2017 8:43 pm
What difference does it make if one prepays 2018, or overpays 2017 ?
As long as it is done before 12/31 it is itemized against the 2017 taxes.
Big difference. Because a 2017 overpayment will generate a form 1099-R as income taxable in 2018. Negating the deduction you took for it in 2017. If applied directly to 2018, however, this won't happen and your deduction for state income tax in 2017 won't be undone. I can't discuss pending legislation, but getting a federal deduction for 2018 state income taxes paid in 2017, that doesn't get "undone" by becoming taxable income in 2018, could make a lot of sense.
I agree with your post. Minor correction - You mean a 1099-G, not 1099-R.

https://www.irs.gov/forms-pubs/about-form-1099g

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Chip » Thu Dec 07, 2017 6:12 am

Thesaints wrote:
Wed Dec 06, 2017 9:07 pm
What I'm considering is not only prepaying the entire tax amount (and decrease withholdings), but going over. It will depend on the brackets, but it should be a non brainer for new retirees, or those expecting substantially lower income for some reason.
You should not prepay more than a good faith estimate of your tax liability. From Pub 17:
Pub17 Page 152 wrote: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 aren’t made in good faith at the time of payment aren’t deductible.
There has been a Tax Court case that backed this up.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Chip » Thu Dec 07, 2017 7:09 am

Leesbro63 wrote:
Wed Dec 06, 2017 8:38 pm
1. Will the state apply a payment received in 2017 toward 2018, or will it just add it to the 2017 ledger? It would seem that if they don't apply to 2018, the only "harm" will be that it will show up as refunded in 2018 and will be taxable income in 2018. In that case, all you've really lost is the short term use of your money.

2. The bigger, real issue is this: Is deducting from Federal income a state income tax payment made in 2017 toward tax year 2018 legal/proper/OK? Absent direct publication or clear tax case law, it would seem to be a reasonable and legal gamble to prepay 2018 state income tax in 2017 if you are fairly certain that your state will apply it correctly to tax year 2018.

Did I correctly summarize this? And what is the answer to number 2?
I think that summarizes it perfectly.

Your #1 seems to be state dependent based on what people have posted here. Some clearly have their systems set up to accept such payments. Mine doesn't, though I have been able to get them to properly credit the payment via handwritten instructions. But I would note that they usually don't cash my check until after Jan 15th.

The "harm" can be greater than what you stated if the payment isn't credited correctly. Here's an example (with made up numbers) of what happened to me. I made a payment for 2008 estimated state income taxes of 10k in Dec 2007. I had also paid 2007 estimated taxes during the year of 8k. I filed my 2007 returns on that basis. My actual state liability for 2007 turned out to be 8k, so my return reflected no refund or amount due. So far, so good.

In 2008 I made no estimated payments because I'd made them all at the end of 2007. I filed my 2008 state return on that basis.

In the summer of 2009, after the computer matching programs had run, my state decided that my 10k 2008 estimated payment should be credited to 2007 instead. So they issued a 10k refund for 2007. And now I was faced with a 2008 return where I had claimed 10k in estimated taxes paid but the state thought I had none.

It took a while to straighten it out. So it's not for the faint of heart if the state doesn't clearly accept future year estimated payments with systems or forms in place.

Re your #2: I have searched for hours looking for something definitive and have yet to find anything. I am somewhat relying on what is omitted from the Pub 17 Page 152 quote in the above post. They could have easily said "for current and prior tax years only", but didn't. And I am using a good faith estimate. Since most of my taxable income comes from Roth conversions I can hit that estimate exactly via the recharacterization process.

The objection most often raised here is that it's just not okay to deduct future year tax liabilities in the current year because you are not liable for them. The contradiction is that it seems that argument says it's okay to make an estimated payment on 1/1/18 for 2018 income that hasn't yet been received (and therefore not liable for), but not okay to make the same payment on 12/31/17.

I would love to see something definitive but I'm not getting my hopes up.

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Re: Prepayment of SALT Taxes? [State and Local]

Post by Leesbro63 » Thu Dec 07, 2017 7:13 am

Great post, Chip. It sounds like this is doable. I will continue to watch this thread and decide as we get closer to the end of the year.

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