Prepayment of SALT Taxes? [State and Local]

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

Post by Thesaints » Thu Dec 14, 2017 2:46 am

j0hnd0e wrote:
Thu Dec 14, 2017 2:34 am
DE 4, yes. My point still stands though - I don't see a way to effectively use this approach for regular people (not self-employed) without claiming withholding allowances in the triple digits.
I'm about to work on that form, but it is my understanding that 1 allowance corresponds roughly to a $1,000 less of withheld tax.

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

Post by j0hnd0e » Thu Dec 14, 2017 2:52 am

Thesaints wrote:
Thu Dec 14, 2017 2:46 am
j0hnd0e wrote:
Thu Dec 14, 2017 2:34 am
DE 4, yes. My point still stands though - I don't see a way to effectively use this approach for regular people (not self-employed) without claiming withholding allowances in the triple digits.
I'm about to work on that form, but it is my understanding that 1 allowance corresponds roughly to a $1,000 less of withheld tax.
$1000 less taxable income, not $1000 less tax

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

Post by boglebrain » Thu Dec 14, 2017 2:53 am

If I’m self-employed and make much of my income as dividend payments is it then safe to prepay your state income tax for 2018 in 2017 if your state allows it? I’m in CA and their website does allow a 2018 payment.

Much of the discussion is around avoiding overpayment and then adjusting w2 withholding which won’t apply to me as I’m self-employed. I was thinking of trying to pay 80-90% of my 2018 liability now.

Is this still gray area and something the IRS may audit or is it definitely not allowed as the income for 2018 is from future work and future dividends?

Thanks

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

Post by Thesaints » Thu Dec 14, 2017 3:17 am

IT is light gray, if not white, area. Why would the state accept estimatedpayments for 2018 in 2017 ? Clearly at that point all income is future income.

You guys help me understand this:

- By end of 2017 I make a 10k estimated tax payment for 2018, equal to my estimated tax liability.

- By 4/15/18 I file schedule A including this 10k payment. Let’s say I save $2,800

- I don’t bother adjusting allowances in 2018 (thanks for the correction) and end up paying 20k in state taxes, while still owing only 10k.

- By 4/15/19 I file my 2018 forms and get a 10k refund from the state. Due to tax law changes in 2018 I take the standard deduction.

- By 4/15/20 I have to file the 2019 forms and the state sends me a 1099-G quoting 10k. Since in 2018 I took the standard deduction state tax refunds are not taxable.

Essentially, I loaned to the state 10k at 0 interest for ~15 months. That’s probably equivalent to losing $150-200 after taxes. What’s wrong about this ?

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

Post by Chip » Thu Dec 14, 2017 5:35 am

Thesaints wrote:
Thu Dec 14, 2017 3:17 am
By 4/15/20 I have to file the 2019 forms and the state sends me a 1099-G quoting 10k. Since in 2018 I took the standard deduction state tax refunds are not taxable.

Essentially, I loaned to the state 10k at 0 interest for ~15 months. That’s probably equivalent to losing $150-200 after taxes. What’s wrong about this ?
Plenty.

First, since you didn't adjust your withholding, you did not make a good faith estimate of your actual 2018 tax liability when you made your estimated payment in 2017. That makes your 2017 estimated payment non-deductible. See Pub 17 and Rev. Rul. 82-208.

Since you gained a federal tax benefit from the 2017 deduction of 2018 state income taxes, the refund is considered a "recovery" in 2019 and is subject to tax. See Worksheet 2 in Pub 525.

Of course I assume you will have already written the IRS, not received a response, and will therefore have the Get Out of Jail Free card that you advocated above. [/sarcasm]

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

Post by chicagoan23 » Thu Dec 14, 2017 7:21 am

Thesaints wrote:
Thu Dec 14, 2017 3:17 am
IT is light gray, if not white, area. Why would the state accept estimatedpayments for 2018 in 2017 ? Clearly at that point all income is future income.

You guys help me understand this:

- By end of 2017 I make a 10k estimated tax payment for 2018, equal to my estimated tax liability.

- By 4/15/18 I file schedule A including this 10k payment. Let’s say I save $2,800

- I don’t bother adjusting allowances in 2018 (thanks for the correction) and end up paying 20k in state taxes, while still owing only 10k.

- By 4/15/19 I file my 2018 forms and get a 10k refund from the state. Due to tax law changes in 2018 I take the standard deduction.

- By 4/15/20 I have to file the 2019 forms and the state sends me a 1099-G quoting 10k. Since in 2018 I took the standard deduction state tax refunds are not taxable.

Essentially, I loaned to the state 10k at 0 interest for ~15 months. That’s probably equivalent to losing $150-200 after taxes. What’s wrong about this ?
But in exchange for that zero interest loan you get the $2,800 benefit from your enhanced 2017 itemized deduction—which you could not claim if you made that estimated tax payment in 2018—right?

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

Post by CAsage » Thu Dec 14, 2017 10:50 am

j0hnd0e wrote:
Thu Dec 14, 2017 2:34 am
Thesaints wrote:
Thu Dec 14, 2017 2:32 am
Form W-4 is for federal allowances, but I think for the case at hand it is state withholdings that matter: form DE 4 for Cali and its equivalent for other states.
DE 4, yes. My point still stands though - I don't see a way to effectively use this approach for regular people (not self-employed) without claiming withholding allowances in the triple digits.
You are both right - I forgot the CA form has (of course) different number. Most salaried people, especially with 401k, and other paycheck deductions, could probably slash their CA state withholding with a DE-4 of 50 or 99. At worst, they will withhold the surplus and you get it back in 2019.... but you still deduct it this year! This forum is very good for exchanging ideas - each person has to sort through their situation and see how to apply them.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Thesaints » Thu Dec 14, 2017 10:58 am

Chip wrote:
Thu Dec 14, 2017 5:35 am
Thesaints wrote:
Thu Dec 14, 2017 3:17 am
By 4/15/20 I have to file the 2019 forms and the state sends me a 1099-G quoting 10k. Since in 2018 I took the standard deduction state tax refunds are not taxable.

Essentially, I loaned to the state 10k at 0 interest for ~15 months. That’s probably equivalent to losing $150-200 after taxes. What’s wrong about this ?
Plenty.

First, since you didn't adjust your withholding, you did not make a good faith estimate of your actual 2018 tax liability when you made your estimated payment in 2017. That makes your 2017 estimated payment non-deductible. See Pub 17 and Rev. Rul. 82-208.

Since you gained a federal tax benefit from the 2017 deduction of 2018 state income taxes, the refund is considered a "recovery" in 2019 and is subject to tax. See Worksheet 2 in Pub 525.

Of course I assume you will have already written the IRS, not received a response, and will therefore have the Get Out of Jail Free card that you advocated above. [/sarcasm]
People here have expressed doubts a massive incrase in allowances is kosher.
Of course, if I can do that even better. I won’t have to give the free loan to California.

You seem to attribute bad faith to estimated payments quite freely and I see you haven’t informed yourself about private letter rulings yet.
chicagoan23 wrote:
Thu Dec 14, 2017 7:21 am
But in exchange for that zero interest loan you get the $2,800 benefit from your enhanced 2017 itemized deduction—which you could not claim if you made that estimated tax payment in 2018—right?
Precisely!

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

Post by Chip » Thu Dec 14, 2017 12:35 pm

Thesaints wrote:
Thu Dec 14, 2017 10:58 am
People here have expressed doubts a massive incrase in allowances is kosher.
Of course, if I can do that even better. I won’t have to give the free loan to California.

You seem to attribute bad faith to estimated payments quite freely and I see you haven’t informed yourself about private letter rulings yet.
I know enough about PLRs to know that they have NOTHING to do with this statement of yours:
Thesaints wrote:Well, if one asks in writing and there is no reply within 30 days, then there cannot be any fines applied it case it is not allowed.
I'm still waiting for you to provide any sort of authoritative reference for this outlandish statement. Say an IRS procedure, IRS publication, Revenue Ruling, Tax Court case, etc. But I'm not holding my breath.

If you have a good idea that your 2018 withholding will cover your state income tax liability, yet still make an estimated payment for that same liability I feel confident that an auditor would say that was not a good faith estimated payment and disallow the deduction. Did you even bother to read Rev. Rul. 82-208? It directly addresses the good faith issue:
Rev. Rul. 82-208 wrote:
ISSUE
May a cash basis taxpayer deduct the entire amount of estimated state income tax payments in the year paid under the circumstances described below?

FACTS
A, a salaried employee, is a cal­endar year taxpayer using the cash receipts and disbursements method of accounting. On December 31, 1981, A had no liability to make an esti­mated state income tax payment. However, A made an estimated state income tax payment of 11x dollars on December 31, 1981 for the 1981 tax year. On A's 1981 federal income tax return, A claimed an additional item­ized deduction of 11x dollars for es­timated state income tax paid. On the date of payment A had no reasonable basis to believe that A had any ad­ditional liability for state income taxes for the calendar year 1981. In 1982, A received a state income tax refund of 11x dollars.

LAW AND ANALYSIS
Section 164(a)(3) of the Internal Revenue Code provides the general rule that state and local, and foreign, income, war profits, and excess prof­its taxes are deductible for the tax year in which paid or accrued.
Section 461(a) of the Code pro­vides that the amount of any allow­able deduction or credit is to be taken for the tax year that is the proper tax year under the method of accounting used in computing taxable income.
Where a taxpayer, pursuant to state law authorizing such payment, makes an estimated payment of state income taxes that is reasonably determined in good faith at the time of payment, such payments are deductible under section 164(a)(3) of the Code. See Es­tate of Lowenstein v. Commissioner, 12 T.C. 694 (1949), acq., 1949-2 C. B. 2, aff'd on other issues sub. nom. First National Bank of Mobile v. Commis­sioner, 183 F. 2d 172 (5th Cir. 1950), cert. denied, 340 U.S. 911 (1951); Es­ tate of Cohen v. Commissioner, T.C.M. 1970-272; Rev. Rul. 71-190, 1971-1 C.B. 70.

On the date of payment, A had no reasonable basis to believe that A had any additional state income taxes for the calendar year 1981. Therefore, the payment was not made in good faith and is not deductible under section 164(a)(3) of the Code.

HOLDING

A may not deduct an estimated state income tax payment if on the date of payment A could not reasonably de­termine, in good faith, that there is an additional state income tax liabil­ity.

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

Post by Thesaints » Thu Dec 14, 2017 12:38 pm

FACTS
A, a salaried employee, is a cal­endar year taxpayer using the cash receipts and disbursements method of accounting. On December 31, 1981, A had no liability to make an esti­mated state income tax payment. However, A made an estimated state income tax payment of 11x dollars on December 31, 1981 for the 1981 tax year. On A's 1981 federal income tax return, A claimed an additional item­ized deduction of 11x dollars for es­timated state income tax paid. On the date of payment A had no reasonable basis to believe that A had any ad­ditional liability for state income taxes for the calendar year 1981. In 1982, A received a state income tax refund of 11x dollars.
FACT: We are talking about making an estimated payment for the following year, not for the one about to end.

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

Post by triceratop » Thu Dec 14, 2017 4:23 pm

Thesaints wrote:
Thu Dec 14, 2017 3:17 am
IT is light gray, if not white, area. Why would the state accept estimatedpayments for 2018 in 2017 ? Clearly at that point all income is future income.

You guys help me understand this:

- By end of 2017 I make a 10k estimated tax payment for 2018, equal to my estimated tax liability.

- By 4/15/18 I file schedule A including this 10k payment. Let’s say I save $2,800

- I don’t bother adjusting allowances in 2018 (thanks for the correction) and end up paying 20k in state taxes, while still owing only 10k.

- By 4/15/19 I file my 2018 forms and get a 10k refund from the state. Due to tax law changes in 2018 I take the standard deduction.

- By 4/15/20 I have to file the 2019 forms and the state sends me a 1099-G quoting 10k. Since in 2018 I took the standard deduction state tax refunds are not taxable.

Essentially, I loaned to the state 10k at 0 interest for ~15 months. That’s probably equivalent to losing $150-200 after taxes. What’s wrong about this ?
(emphasis mine)

Just a reminder that while discussing the viability of prepayment of SALT taxes is perfectly fine, please do not discuss any rationale you would have to do so, such as speculation on tax law changes. See the forum rules
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Tanelorn » Thu Dec 14, 2017 4:36 pm

Chip wrote:
Thu Dec 14, 2017 12:35 pm
If you have a good idea that your 2018 withholding will cover your state income tax liability, yet still make an estimated payment for that same liability I feel confident that an auditor would say that was not a good faith estimated payment and disallow the deduction.
If you grant that those of us with predicable paychecks can have a good faith estimate of our tax liability for the next year, I don't see why we can't pay it via estimated payments instead of withholdings. If you made a large estimated payment for 2018 and then, in addition, continued to have your normal withholdings made from your paycheck, then you'll end with a refund and potentially exceed the guidelines. But why would you ever do that? Just reduce your withholdings by the amount of your estimated payments already made so you're in line to meet your estimated tax liabilities for that year.

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

Post by Thesaints » Thu Dec 14, 2017 4:59 pm

States have rules concerning withholdings modifications. Check carefully with your own state before asking for 199 allowances. DE 4 for California has a worksheet on the back and warns that withholdings reductions not made in good faith are liable to a $500 fine, for instance.

However, if someone planned to sell a large stock position to finance a home purchase, let's say, who could blame him for an estimated tax payment covering those capital gains ?

The overall philosophy is that a state doesn't want to get shafted and receive its money late. The way we have discussed the issue, they would be receiving it earlier instead.

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

Post by likashing » Thu Dec 14, 2017 5:47 pm

We are in AMT in a high income tax state. Played with TurboTax by adjusting property tax up, and lowering it gradually to $0, but that did not affect Fed tax refund one bit. Looks like we are deep enough in AMT and property tax is completely un-deductible already.

Our mortgage interest is low (~$7k), and we will likely claim the standard deduction if the bill passes ($24k joint standard deduction). After playing with the mortgage interest paid under TurboTax, it looks like it is beneficial to prepay a couple of mortgage payments, and take more mortgage interest deduction in 2017 (itemized), and take standard deduction in 2018 and beyond. Does this make sense?

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

Post by kevinpet » Thu Dec 14, 2017 9:05 pm

Shikoku wrote:
Fri Dec 08, 2017 6:46 pm
"For homeowners not subject to the AMT, however, prepaying some 2018 property taxes this year could boost the value of their deduction. The Internal Revenue Service allows you to write off property taxes in the year you pay to the taxing authority."
Source: https://www.cnbc.com/2017/12/04/homeown ... eform.html

Can someone rely on this advice?
In California, or at least in San Mateo County, tax assessment is for a year at a time, and is due in two payments, the first in Dec and the second in Apr of the following year. I paid my second installment of 2017 taxes ahead of time. I don't see any way I could run into problems paying 2017 taxes in 2017.

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

Post by Thesaints » Thu Dec 14, 2017 10:05 pm

kevinpet wrote:
Thu Dec 14, 2017 9:05 pm
In California, or at least in San Mateo County, tax assessment is for a year at a time, and is due in two payments, the first in Dec and the second in Apr of the following year. I paid my second installment of 2017 taxes ahead of time. I don't see any way I could run into problems paying 2017 taxes in 2017.
One of my car registrations expires on Jan 18. Do I necessarily have to pay it between Jan 1 and Jan 17 ? DMV sends me the bill in November...

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

Post by Chip » Fri Dec 15, 2017 5:04 am

Tanelorn wrote:
Thu Dec 14, 2017 4:36 pm
If you made a large estimated payment for 2018 and then, in addition, continued to have your normal withholdings made from your paycheck, then you'll end with a refund and potentially exceed the guidelines. But why would you ever do that?
The only reason I said anything is that Thesaints suggested exactly that in this post, then asked what was wrong with it.
Just reduce your withholdings by the amount of your estimated payments already made so you're in line to meet your estimated tax liabilities for that year.
That seems reasonable to me but your state may have limits on how much you can reduce withholdings legally.

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

Post by Chip » Fri Dec 15, 2017 5:13 am

Thesaints wrote:
Thu Dec 14, 2017 12:38 pm
FACT: We are talking about making an estimated payment for the following year, not for the one about to end.
So is it your position that the difference in those situations negates the requirement for a good faith estimate?

I hope you haven't already forgotten Pub 17, mentioned earlier in this thread:
Pub 17 page 151 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.
I'm still waiting for you to provide any sort of authoritative reference for the statement you made earlier, repeated below. Say an IRS procedure, IRS publication, Revenue Ruling, Tax Court case, etc. All I'm hearing are crickets chirping.
Thesaints wrote:Well, if one asks in writing and there is no reply within 30 days, then there cannot be any fines applied it case it is not allowed.

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

Post by Cyclesafe » Fri Dec 15, 2017 10:18 am

I've been "bunching" private medical insurance and CA property tax since retirement in 2000. It never occurred to me to also bunch CA state income taxes. Thanks Bogleheads!

2017 was supposed to be an "unbunch" year, but with the "uncertainty" it makes roughly $4k of sense - at a federal marginal rate of 25% - for me to move $20k of 2018 medical insurance (already committed, but payments otherwise due monthly from January 1, 2018), $5k of (already billed, but 2nd payment due in 2018) property tax, and $11k of 2018 projected CA state income tax - well within my 2017 "safe harbor" actual of $12k - into 2017. This is about a 22% return on my money for the median 6 months I am prepaying.

TurboTax iterations indicated that the potential benefit any further prepayment of CA state income tax will be negated by the incurrence of AMT. Furthermore, incremental increases in income at this point are taxed at 32%! Danger, Will Robinson!

Regardless of the outcome of the uncertainty, I will take the standard deduction in 2018 as I am essentially bereft of other deductions such as mortgage interest and flexible charitable contributions.

I believe I can do this because I am required to make estimated 2018 payments, California permits prepaying 2018 projected state income taxes, I have no earned income and thus no W4 on file, and I am acting within my safe harbor in readily-demonstrable (to me at least) "good faith". The only issue is cash flow - and I am having to dip into my emergency fund to make this happen.

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

Post by Thesaints » Fri Dec 15, 2017 10:28 am

Overpaying state taxes by way of an estimated payment on the last day of the year obviously shows not good, but bad faith: at that point liabilities for the year just ended are set.
A very different case is making an estimated payment on the last day of the year covering the year about to begin. Depending on the size of the estimated payment it would be hard, if not impossible, to prove absence of good faith, even if eventually a state tax refund is generated.

)

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

Post by Tanelorn » Fri Dec 15, 2017 11:05 am

Thesaints wrote:
Fri Dec 15, 2017 10:28 am
Overpaying state taxes by way of an estimated payment on the last day of the year obviously shows not good, but bad faith: at that point liabilities for the year just ended are set.
There's not a question of "faith" involved in when you pay your taxes. If you underwithhold or don't pay enough estimated along the way, you get a bill for significant interest and or penalties. As long as you pay in the end, I'm sure the government will be happy, faith issues notwithstanding.

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

Post by Leesbro63 » Fri Dec 15, 2017 11:09 am

Thesaints wrote:
Fri Dec 15, 2017 10:28 am
Overpaying state taxes by way of an estimated payment on the last day of the year obviously shows not good, but bad faith: at that point liabilities for the year just ended are set.
A very different case is making an estimated payment on the last day of the year covering the year about to begin. Depending on the size of the estimated payment it would be hard, if not impossible, to prove absence of good faith, even if eventually a state tax refund is generated.

)
I guess using this logic, an aggressive IRS agent could make the case that prepaying estimated state income taxes, at least for the 2nd, 3rd and 4th quarters, this far in advance (prior to the start of the calendar year that you're paying for), is not a good faith thing. There would be no logical reason I can think of to do so other than to get the Federal tax deduction in the current year. Is that bad faith if the total state income tax payment is in line with what will probably be the actual tax? Again, I guess it depends on how aggressive one wants to be in interpreting the term "good faith".

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

Post by Thesaints » Fri Dec 15, 2017 11:37 am

I'm quite convinced that the "this far in advance" wouldn't be an issue. The government cannot ask someone to pay only on or about the due date, especially if the payment recipient is accepting the money.

There is the potential issue of justifying why one made an estimated payment (of that size) at all. Self-employed have no problem, since they can simply replace their quarterly estimated payments with a single one.
More complex is the issue of wage workers, being not straightforward how they can reduce withholdings to compensate. Probably they would end up with a sizable refund, but it is up to the IRS agent at that point to convince the court that the tax payer could not have had that extra income, not subjected to withholdings, to justify the estimated payment.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Cyclesafe » Fri Dec 15, 2017 11:50 am

Leesbro63 wrote:
Fri Dec 15, 2017 11:09 am
I guess using this logic, an aggressive IRS agent could make the case that prepaying estimated state income taxes, at least for the 2nd, 3rd and 4th quarters, this far in advance (prior to the start of the calendar year that you're paying for), is not a good faith thing. There would be no logical reason I can think of to do so other than to get the Federal tax deduction in the current year. Is that bad faith if the total state income tax payment is in line with what will probably be the actual tax? Again, I guess it depends on how aggressive one wants to be in interpreting the term "good faith".
Good point.

Black's defines "good faith" as a state of mind denoting: 1) honesty or lawfulness of belief or purpose, 2) faithfulness to one's duty or obligation, 3) observance of reasonable commercial standards of fair dealing in a given trade or business, or 4) absence of intent to defraud or to seek unconscionable advantage.

"Tax avoidance" is defined as "the act of taking advantage of legally available tax planning opportunities in order to minimize one's tax liability.

Disturbedly, "tax evasion" is defined as "the act of willfully attempting to defeat or circumvent the tax law in order to minimize one's tax liability; tax evasion is punishable by both civil and criminal penalties.

The difference between avoidance and evasion, non-crimnality and criminality, is whether he action taken is legal. All actions proposed (as far as I can tell) seem legal - and as long as they are legal, they are in the realm of avoidance. Now this doesn't mean that they won't nevertheless be disallowed by your aggressive IRS agent: the consequence being that the taxpayer will be denied being able to deduct prepayment of 2018 taxes on their 2017 return. But these won't be fully deductible (YMMV) in 2018 anyway - depending. So little or no downside.

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

Post by Nate79 » Fri Dec 15, 2017 12:44 pm

If I have a salary position, I know my pay rate, I know the tax rate, I can make an estimated tax payment same as if I was self employed. There is no requirement that my taxes must be paid thru payroll deduction thru the year. In addition if I thought I might have some extra income in 2018 I can make an estimated tax payment in advance. If it doesn't happen is immaterial.

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

Post by CAsage » Fri Dec 15, 2017 12:53 pm

Cyclesafe wrote:
Fri Dec 15, 2017 10:18 am
TurboTax iterations indicated that the potential benefit any further prepayment of CA state income tax will be negated by the incurrence of AMT. Furthermore, incremental increases in income at this point are taxed at 32%! Danger, Will Robinson!
I found that a massive (ten year's worth, in my case, hoping I live that long...) Charitable Donation to a Donor Advised Fund will manage to lower the income to enable one to pull in more of 2018 state income taxes. That was the best I could do, tragically filing as single means the AMT hits a lot lower than for lucky married couples. Take a gander at form 6251, and see how close you are to the 120K/160K number on line 28 - you want to get as close to that as you can to maximize line 29. Note this advice is purely from my own experimenting with the numbers - YMMV. I cannot deduct all of my 2018 state taxes, but I got about half of it in. Will not be itemizing in 2018 - no matter what.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by MarkNYC » Fri Dec 15, 2017 1:13 pm

Nate79 wrote:
Fri Dec 15, 2017 12:44 pm
If I have a salary position, I know my pay rate, I know the tax rate, I can make an estimated tax payment same as if I was self employed. There is no requirement that my taxes must be paid thru payroll deduction thru the year.
This is not correct. Withholding on wages is not optional. In order to claim an exemption from federal tax withholding, certain conditions must be met, one of which is that the taxpayer expects to have zero tax liability for the year. Falsely claiming a right to exemption from withholding can result in penalties being assessed. NY has similar rules and I would expect most other states do also.

For obvious reasons, the IRS and state tax departments do not want wage earners to be able to choose zero tax withholding because the taxpayer instead prefers to make estimated payments.

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

Post by Cyclesafe » Fri Dec 15, 2017 1:28 pm

CAsage wrote:
Fri Dec 15, 2017 12:53 pm
I found that a massive (ten year's worth, in my case, hoping I live that long...) Charitable Donation to a Donor Advised Fund will manage to lower the income to enable one to pull in more of 2018 state income taxes. That was the best I could do, tragically filing as single means the AMT hits a lot lower than for lucky married couples. Take a gander at form 6251, and see how close you are to the 120K/160K number on line 28 - you want to get as close to that as you can to maximize line 29. Note this advice is purely from my own experimenting with the numbers - YMMV. I cannot deduct all of my 2018 state taxes, but I got about half of it in. Will not be itemizing in 2018 - no matter what.
Yes YMMV. My form 6251 line 29 number is lower because it is calculated using the form 6251 worksheet. But the good news is that lines 33 and 34 are exactly equal, IOW's taxes paid under the normal scheme are exactly the same as those paid under AMT.

It looks like I would be able to deduct in 2017 90% of my projected 2018 CA state tax obligation.

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

Post by CAsage » Fri Dec 15, 2017 1:42 pm

Cyclesafe wrote:
Fri Dec 15, 2017 1:28 pm

It looks like I would be able to deduct in 2017 90% of my projected 2018 CA state tax obligation.
That is perfect - exactly what I would be trying for! I got 1.5 years worth of property taxes and half my 2018 CA SALT - as good as I can make it.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Nutbin » Fri Dec 15, 2017 2:24 pm


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

Post by MarkNYC » Fri Dec 15, 2017 3:36 pm

Nutbin wrote:
Fri Dec 15, 2017 2:24 pm
Please see this article

https://www.journalofaccountancy.com/ne ... 18054.html
I heard today that the AICPA plans to issue some guidance that states, in their opinion, there is no substantial authority for claiming a 2017 tax deduction for prepayment of 2018 state income tax. Some prominent law firms and several of the big four accounting firms think that a prepayment is deductible. So some uncertainty remains.

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

Post by Thesaints » Fri Dec 15, 2017 4:20 pm

Nate79 wrote:
Fri Dec 15, 2017 12:44 pm
If I have a salary position, I know my pay rate, I know the tax rate, I can make an estimated tax payment same as if I was self employed. There is no requirement that my taxes must be paid thru payroll deduction thru the year. In addition if I thought I might have some extra income in 2018 I can make an estimated tax payment in advance. If it doesn't happen is immaterial.
That is not allowed in California, for instance. At this point, the only kosher reductions I can think of is estimating allowances based on itemized deduction, without including income from investments (i.e. distributions from stocks) which is uncertain. It is small potatoes, though. In my personal situation I couldn't increase allowances more than 10.

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Tax strategy for 2018

Post by ceeshrek » Fri Dec 15, 2017 5:25 pm

[Thread merged into here, see below. --admin LadyGeek]

Hello,

Hope someone can answer this tax question.

I have the option to prepay 2018 property taxes by 12/22/2017 and have it count towards my 2017 taxes.

Once I do that, do I still have the option to choose to deduct this payment in either 2017 or 2018? Or, am i locked into taking the deduction in 2017 only?

[OT comment removed by admin LadyGeek]

Thank you

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Re: Tax strategy for 2018

Post by livesoft » Fri Dec 15, 2017 5:26 pm

No, you do not have the option. If you pay in 2017, then the deduction happens in 2017.
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Re: Tax strategy for 2018

Post by Juice3 » Fri Dec 15, 2017 5:29 pm

"Bunching" deductions is a legit strategy, regardless if tax law is changed.

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

Post by Cyclesafe » Fri Dec 15, 2017 5:33 pm

MarkNYC wrote:
Fri Dec 15, 2017 3:36 pm
Nutbin wrote:
Fri Dec 15, 2017 2:24 pm
Please see this article

https://www.journalofaccountancy.com/ne ... 18054.html
I heard today that the AICPA plans to issue some guidance that states, in their opinion, there is no substantial authority for claiming a 2017 tax deduction for prepayment of 2018 state income tax. Some prominent law firms and several of the big four accounting firms think that a prepayment is deductible. So some uncertainty remains.
Fascinating! But not too good for what I wanted to do.....

Better to wait awhile before pulling the triggers. 10 working days left.

Paying for medical insurance or property tax is satisfying established liabilities. Whether these are paid for in a lump sum or paid according to some schedule ought to be irrelevant to the IRS. "Bunching" is predicated on paying liabilities either when incurred or over time according to some schedule depending on the better tax result over two subsequent years.

The article argues that prepayments of state income tax are not satifaction of an established liability (since they are undetermined for a year that "hasn't happened yet"), but instead are "deposits" made in anticipation of incurring tax liablities - that may or may not occur. Perhaps mandated estimated tax payments are actually deposits too. And it wouldn't matter when they were paid since deposits are not deductible.

Gotta be pretty brave to act counter to AICPA guidance........

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

Post by Chicago60 » Fri Dec 15, 2017 6:43 pm

MarkNYC wrote:
Fri Dec 15, 2017 3:36 pm
Nutbin wrote:
Fri Dec 15, 2017 2:24 pm
Please see this article

https://www.journalofaccountancy.com/ne ... 18054.html
I heard today that the AICPA plans to issue some guidance that states, in their opinion, there is no substantial authority for claiming a 2017 tax deduction for prepayment of 2018 state income tax. Some prominent law firms and several of the big four accounting firms think that a prepayment is deductible. So some uncertainty remains.
Thanks for posting this article and the comments. I suppose this is as definitive an answer (and not the answer I was hoping for) as one is likely to receive before December 31.

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

Post by triceratop » Fri Dec 15, 2017 7:17 pm

I removed an off-topic post. It's perfectly fine to discuss various interpretations of existing law and the legality of bunching SALT deductions in various situations. Just not proposed legislation.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by thangngo » Fri Dec 15, 2017 7:42 pm

MarkNYC wrote:
Fri Dec 15, 2017 3:36 pm
Nutbin wrote:
Fri Dec 15, 2017 2:24 pm
Please see this article

https://www.journalofaccountancy.com/ne ... 18054.html
I heard today that the AICPA plans to issue some guidance that states, in their opinion, there is no substantial authority for claiming a 2017 tax deduction for prepayment of 2018 state income tax. Some prominent law firms and several of the big four accounting firms think that a prepayment is deductible. So some uncertainty remains.
I would not make a prepayment of SALT taxes until I know for sure that it works. I'm reading a conference report that specifically bars you from prepaying 2018 state income taxes in 2017. Again, nothing has set in stone yet.

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

Post by LadyGeek » Fri Dec 15, 2017 7:54 pm

ceeshrek - I merged your thread into the on-going discussion.

Your post comes before triceratop's message - you could not see it until the thread was merged.

Please refrain from discussing tax strategies until the legislation is signed into law. See: Political comments and proposed tax plan remain off-topic
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Re: Prepayment of SALT Taxes? [State and Local]

Post by string3599 » Fri Dec 15, 2017 8:23 pm

thangngo wrote:
Fri Dec 15, 2017 7:42 pm
MarkNYC wrote:
Fri Dec 15, 2017 3:36 pm
Nutbin wrote:
Fri Dec 15, 2017 2:24 pm
Please see this article

https://www.journalofaccountancy.com/ne ... 18054.html
I heard today that the AICPA plans to issue some guidance that states, in their opinion, there is no substantial authority for claiming a 2017 tax deduction for prepayment of 2018 state income tax. Some prominent law firms and several of the big four accounting firms think that a prepayment is deductible. So some uncertainty remains.
I would not make a prepayment of SALT taxes until I know for sure that it works. I'm reading a conference report that specifically bars you from prepaying 2018 state income taxes in 2017. Again, nothing has set in stone yet.
Agreed, here is the specific wording from the conference report:
The conference agreement also provides that, in the case of 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, the payment shall be treated as paid on the last day of the taxable year for which such tax is so imposed for purposes of applying the provision limiting the dollar amount of the deduction. Thus, under the provision, an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.

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

Post by Thesaints » Fri Dec 15, 2017 8:31 pm

It has been a good thread...

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

Post by Theseus » Fri Dec 15, 2017 8:34 pm

thangngo wrote:
Fri Dec 15, 2017 7:42 pm
MarkNYC wrote:
Fri Dec 15, 2017 3:36 pm
Nutbin wrote:
Fri Dec 15, 2017 2:24 pm
Please see this article

https://www.journalofaccountancy.com/ne ... 18054.html
I heard today that the AICPA plans to issue some guidance that states, in their opinion, there is no substantial authority for claiming a 2017 tax deduction for prepayment of 2018 state income tax. Some prominent law firms and several of the big four accounting firms think that a prepayment is deductible. So some uncertainty remains.
I would not make a prepayment of SALT taxes until I know for sure that it works. I'm reading a conference report that specifically bars you from prepaying 2018 state income taxes in 2017. Again, nothing has set in stone yet.
For those looking for specific language it is on the bottom of page 87 and top of Page 88.

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

Post by Apartyofthefirstpart » Fri Dec 15, 2017 8:57 pm

likashing wrote:
Thu Dec 14, 2017 5:47 pm
We are in AMT in a high income tax state. Played with TurboTax by adjusting property tax up, and lowering it gradually to $0, but that did not affect Fed tax refund one bit. Looks like we are deep enough in AMT and property tax is completely un-deductible already.

Our mortgage interest is low (~$7k), and we will likely claim the standard deduction if the bill passes ($24k joint standard deduction). After playing with the mortgage interest paid under TurboTax, it looks like it is beneficial to prepay a couple of mortgage payments, and take more mortgage interest deduction in 2017 (itemized), and take standard deduction in 2018 and beyond. Does this make sense?
Unfortunately, deducting prepaid mortgage interest is not permitted. If a mortgage payment is due January 1st, then paying and deducting it by the end of the previous December is acceptable but you can't go any farther than that. If you try "prepaying a couple of mortgage payments," it could give an IRS auditor an opportunity to increase government revenue. See IRS Publication 17 for 2017, page 160. The IRS Tax Guide for 2017 gives a specific example: "If you prepaid interest in 2017 that accrued in full by January 15, 2018, this prepaid interest may be included in box 1 of Form 1098. However, you can't deduct the prepaid amount for January 2018 in 2017. (See Prepaid interest, earlier.) You will have to figure the interest that accrued for 2018 and subtract it from the amount in box 1. You will include the interest for January 2018 with the other interest you pay for 2018."

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

Post by Tanelorn » Fri Dec 15, 2017 11:21 pm

Looks like too much public discussion of this resulted in the law be re-written to explicitly exclude the deduction for future years state tax payments. See Sec 11042 of the current proposal.

https://www.wsj.com/public/resources/do ... 121517.pdf

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

Post by ray.james » Sat Dec 16, 2017 12:18 am

Great discussion. I am wondering if the VLF portion of DMV fees comes under the same rules as property taxes in regard to pre-payment treatment?

I am planning to pre-pay vehicle license fees early this year which are due in April. Its not much but would save 100+ bucks. I do not own a home to take advantage of property taxes. :happy
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Cyclesafe » Sat Dec 16, 2017 12:27 am

Tanelorn wrote:
Fri Dec 15, 2017 11:21 pm
Looks like too much public discussion of this resulted in the law be re-written to explicitly exclude the deduction for future years state tax payments. See Sec 11042 of the current proposal.

https://www.wsj.com/public/resources/do ... 121517.pdf
Well, this clears up a lot. Thanks for posting.

Ray James, if you have a bill in hand there's no reason not to pay it before the end of the year and deduct the VLF portion in 2017. If you don't have a bill, then......

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

Post by White Coat Investor » Sat Dec 16, 2017 12:51 am

New York Times reporting that this loophole is being closed by the compromise bill. Much ado about nothing apparently (although I'll still pay my 2017 taxes this month.)

https://www.nytimes.com/2017/12/15/us/p ... v=top-news
In a pre-emptive move against accounting maneuvers in high-tax states such as New York and California, the bill prohibits taxpayers from prepaying next year’s state and local income or property taxes, in order to deduct them from 2018 taxes. That form of tax planning would have allowed taxpayers to benefit more from the full state and local deduction this year before it is capped next year.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by chicagoan23 » Sat Dec 16, 2017 6:48 am

White Coat Investor wrote:
Sat Dec 16, 2017 12:51 am
New York Times reporting that this loophole is being closed by the compromise bill. Much ado about nothing apparently (although I'll still pay my 2017 taxes this month.)

https://www.nytimes.com/2017/12/15/us/p ... v=top-news
In a pre-emptive move against accounting maneuvers in high-tax states such as New York and California, the bill prohibits taxpayers from prepaying next year’s state and local income or property taxes, in order to deduct them from 2018 taxes. That form of tax planning would have allowed taxpayers to benefit more from the full state and local deduction this year before it is capped next year.
By my reading the NY Times has it wrong with respect to property tax payments, as the conference report states:
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.
Section 164(a) of the Code distinguishes between state and local real property taxes (Section 164(a)(1)) and state and local income taxes (Section 164(a)(3)).

In addition, property taxes (at least in Illinois) are paid in arrears (i.e., 2017 property taxes are due in 2018). So property taxes due in 2018 are not "imposed for a taxable year beginning after December 31, 2017" as I read it.

I'd be curious if those who bunch their annual property taxes to pay two years' worth in one think they can still do so, or if anyone has found any similar analysis on prepayment of property taxes.

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

Post by mouses » Sat Dec 16, 2017 7:19 am

I haven't read all the replies, but

"In a pre-emptive move against accounting maneuvers in high-tax states such as New York and California, the bill prohibits taxpayers from prepaying next year’s state and local income or property taxes, in order to deduct them from 2018 taxes. That form of tax planning would have allowed taxpayers to benefit more from the full state and local deduction this year before it is capped next year."

https://www.nytimes.com/2017/12/15/us/p ... -bill.html

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