Prepayment of SALT Taxes? [State and Local]

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
mouses
Posts: 3837
Joined: Sat Oct 24, 2015 12:24 am

be careful, no longer allowed to prepay local and state taxes for a deduction

Post by mouses » Sat Dec 16, 2017 7:23 am

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

Since people might get into difficulty with this common strategy, I thought it was worth risking the ire of the mods and point out the item below.

Since the tax bill is like 99.99999% likely to pass, I hope this post doesn't get deleted as being speculative.

"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

It isn't clear what happens if one does this. Perhaps you can prepay but are not allowed to deduct that part.

Biglaw Investor
Posts: 135
Joined: Tue Oct 20, 2015 1:08 pm
Location: Brooklyn

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by Biglaw Investor » Sat Dec 16, 2017 7:35 am

I just read this too and was coming to the forum to post the same thing.

"Taxpayers may deduct only up to $10,000 total, which may include any combination of state and local taxes, including property taxes (also sales taxes). But don’t try to prepay your income taxes before year-end to circumvent the new limit. The tax proposal is one step ahead of you and your accountant and won’t allow it."

https://www.nytimes.com/2017/12/16/your ... anges.html

Biglaw Investor
Posts: 135
Joined: Tue Oct 20, 2015 1:08 pm
Location: Brooklyn

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

Post by Biglaw Investor » Sat Dec 16, 2017 7:44 am

chicagoan23 wrote:
Sat Dec 16, 2017 6:48 am
By my reading the NY Times has it wrong with respect to property tax payments
I agree with your reading.

mouses
Posts: 3837
Joined: Sat Oct 24, 2015 12:24 am

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by mouses » Sat Dec 16, 2017 7:47 am

As far as I can tell, between this state and local tax cap and doing away with the personal exemption, I'll have about $7000 more income exposed to taxation than previously. Last year my total taxable income (line 43) was about $10K. (I'm retired, so that $10K is the taxable part of Social Security and taxable savings earnings minus hefty Sched. A stuff mainly state and local taxes and medical expenses.) If they had kept in excluding medical expenses, it would have been far worse. I'm sure glad to see this tax "cut" bill. Oh, wait.

IowaFarmBoy
Posts: 599
Joined: Fri Jan 22, 2010 8:19 am

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by IowaFarmBoy » Sat Dec 16, 2017 8:01 am

OK, I am confused. The first link says you can't prepay this year and deduct against your 2018 taxes. But if I pre-pay this year, I would deduct on my 2017 taxes. I wonder if the writer was considering taxes for 2017 filed in 2018 as "2018 taxes". The second link doesn't mention 2018 specifically.

Longdog
Posts: 1131
Joined: Sun Feb 09, 2014 6:56 pm
Location: Philadelphia

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by Longdog » Sat Dec 16, 2017 8:09 am

IowaFarmBoy wrote:
Sat Dec 16, 2017 8:01 am
OK, I am confused. The first link says you can't prepay this year and deduct against your 2018 taxes. But if I pre-pay this year, I would deduct on my 2017 taxes. I wonder if the writer was considering taxes for 2017 filed in 2018 as "2018 taxes". The second link doesn't mention 2018 specifically.
The text of the bill covers that specific case. And all such cases going forward.

Also, it defeats the "horse race" Roth conversion strategy by eliminating the ability to recharacterize a Roth Conversion.

It does retain the ability to use specific ID for tax lot identification, so that preserves the ability to do tax loss and tax gain harvesting.
Steve

tibbitts
Posts: 8110
Joined: Tue Feb 27, 2007 6:50 pm

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by tibbitts » Sat Dec 16, 2017 8:15 am

99.99999% likely to pass? I thought those were the odds on health care legislation... ?

AnonJohn
Posts: 182
Joined: Wed Oct 07, 2015 2:45 pm

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

Post by AnonJohn » Sat Dec 16, 2017 8:25 am

chicagoan23 wrote:
Sat Dec 16, 2017 6:48 am
...

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.
I also agree with this reading. Another wrinkle to consider wrt to property taxes: In my state they follow an October to October Fiscal Year. So I'm in my state's FY 18 already. The first half is usually paid in March, but I think the obligation exists now, since that FY has started.

Chicagoan - In light of the Cook County Treasurer's forward-looking approach to this, you might reach out directly with your questions. Unless I'm reading too much into your handle. :D
https://chicago.suntimes.com/chicago-po ... tax-bills/

John

mouses
Posts: 3837
Joined: Sat Oct 24, 2015 12:24 am

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by mouses » Sat Dec 16, 2017 8:34 am

tibbitts wrote:
Sat Dec 16, 2017 8:15 am
99.99999% likely to pass? I thought those were the odds on health care legislation... ?
They've got Susan Collins and McCain on board, so it looks like they have the votes. It was pretty clear the ACA repeal did not have the votes, although the current bill deals a body blow to the ACA anyway.

User avatar
samsoes
Posts: 894
Joined: Tue Mar 05, 2013 9:12 am
Location: Northeast Rat Race

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by samsoes » Sat Dec 16, 2017 8:48 am

Longdog wrote:
Sat Dec 16, 2017 8:09 am

Also, it defeats the "horse race" Roth conversion strategy by eliminating the ability to recharacterize a Roth Conversion.
This also eliminates the post-12/31 strategy of fine-tuning your MAGI to maximize ACA subsidies for the prior tax year.

A common technique was to do a large Roth conversion and recharacterize post-12/31 to make sure you're above the Medicaid cutoff line or just below the ACA cliff at the high end.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)

Chicago60
Posts: 381
Joined: Tue Jan 29, 2013 3:40 pm

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

Post by Chicago60 » Sat Dec 16, 2017 9:12 am

chicagoan23 wrote:
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.
I agree that the NYT misinterpreted the bill, unless there is some other provision in the bill prohibiting the prepayment of PROPERTY taxes, as opposed to INCOME taxes--State or local. I planned on paying in 2017 the semi-annual Cook County real estate tax bill that is due in February 2018, but now I am wondering if I should pay not only that amount, but an estimate of the balance due in September 2018.

theplayer11
Posts: 538
Joined: Tue Jul 22, 2014 8:55 pm

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by theplayer11 » Sat Dec 16, 2017 9:23 am

mouses wrote:
Sat Dec 16, 2017 7:47 am
As far as I can tell, between this state and local tax cap and doing away with the personal exemption, I'll have about $7000 more income exposed to taxation than previously. Last year my total taxable income (line 43) was about $10K. (I'm retired, so that $10K is the taxable part of Social Security and taxable savings earnings minus hefty Sched. A stuff mainly state and local taxes and medical expenses.) If they had kept in excluding medical expenses, it would have been far worse. I'm sure glad to see this tax "cut" bill. Oh, wait.
is your marginal tax rate going down? If so, that will offset and most likely lower your taxes. Despite what the media is pushing, most everyone will be paying less taxes.

Chicago60
Posts: 381
Joined: Tue Jan 29, 2013 3:40 pm

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by Chicago60 » Sat Dec 16, 2017 9:24 am

Be real careful, as post numbers 249-253 of this post viewtopic.php?f=2&t=233726&start=250 suggests NYT might have it wrong and that prepayment of property taxes may still be deductible.

rkhusky
Posts: 5899
Joined: Thu Aug 18, 2011 8:09 pm

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by rkhusky » Sat Dec 16, 2017 9:34 am

theplayer11 wrote:
Sat Dec 16, 2017 9:23 am
mouses wrote:
Sat Dec 16, 2017 7:47 am
As far as I can tell, between this state and local tax cap and doing away with the personal exemption, I'll have about $7000 more income exposed to taxation than previously. Last year my total taxable income (line 43) was about $10K. (I'm retired, so that $10K is the taxable part of Social Security and taxable savings earnings minus hefty Sched. A stuff mainly state and local taxes and medical expenses.) If they had kept in excluding medical expenses, it would have been far worse. I'm sure glad to see this tax "cut" bill. Oh, wait.
is your marginal tax rate going down? If so, that will offset and most likely lower your taxes. Despite what the media is pushing, most everyone will be paying less taxes.
One's marginal tax rate could go up because loss of exemptions is greater than increase in deductions, but tax go down because of increase in child tax credit.

mouses
Posts: 3837
Joined: Sat Oct 24, 2015 12:24 am

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by mouses » Sat Dec 16, 2017 9:40 am

theplayer11 wrote:
Sat Dec 16, 2017 9:23 am
mouses wrote:
Sat Dec 16, 2017 7:47 am
As far as I can tell, between this state and local tax cap and doing away with the personal exemption, I'll have about $7000 more income exposed to taxation than previously. Last year my total taxable income (line 43) was about $10K. (I'm retired, so that $10K is the taxable part of Social Security and taxable savings earnings minus hefty Sched. A stuff mainly state and local taxes and medical expenses.) If they had kept in excluding medical expenses, it would have been far worse. I'm sure glad to see this tax "cut" bill. Oh, wait.
is your marginal tax rate going down? If so, that will offset and most likely lower your taxes. Despite what the media is pushing, most everyone will be paying less taxes.
It is going down, but not enough to offset the loss due to the changes in exemption and deductions. My tax last year was about $1K. With the new stuff and lower marginal tax rate, it will be about $2K. Single, no dependents.

If I didn't itemize, I would also get whacked because the loss of both the standard and the extra exemption for seniors is greater than the increase in the standard deduction. A lot of seniors would seem to be in this boat.

Chip
Posts: 2371
Joined: Wed Feb 21, 2007 4:57 am

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by Chip » Sat Dec 16, 2017 9:58 am

mouses wrote:
Sat Dec 16, 2017 9:40 am
If I didn't itemize, I would also get whacked because the loss of both the standard and the extra exemption for seniors is greater than the increase in the standard deduction. A lot of seniors would seem to be in this boat.
There is no extra exemption for seniors under current law. There is a larger standard deduction than for those under age 65.

MikeG62
Posts: 1219
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by MikeG62 » Sat Dec 16, 2017 10:17 am

Longdog wrote:
Sat Dec 16, 2017 8:09 am
IowaFarmBoy wrote:
Sat Dec 16, 2017 8:01 am
OK, I am confused. The first link says you can't prepay this year and deduct against your 2018 taxes. But if I pre-pay this year, I would deduct on my 2017 taxes. I wonder if the writer was considering taxes for 2017 filed in 2018 as "2018 taxes". The second link doesn't mention 2018 specifically.
The text of the bill covers that specific case. And all such cases going forward.
I am with Longdog - this article only seems to say that you can't pay tax your 2018 tax in 2017 and then deduct that payment "in 2018" - that makes complete sense and is no different than existing law (tax only deductible in year paid...).

IowaFarmBoy, can you paste the text you reference when you say "the bill covers that specific case". I have searched a pdf version of the bill and cannot find this covered.
Real Knowledge Comes Only From Experience

User avatar
corn18
Posts: 1067
Joined: Fri May 22, 2015 6:24 am

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by corn18 » Sat Dec 16, 2017 10:22 am

Image

jebmke
Posts: 8459
Joined: Thu Apr 05, 2007 2:44 pm

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by jebmke » Sat Dec 16, 2017 10:31 am

^ this is how I read the text as well. Trying to interpret tax code, existing or proposed, from newspaper articles is risky.
When you discover that you are riding a dead horse, the best strategy is to dismount.

MikeG62
Posts: 1219
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by MikeG62 » Sat Dec 16, 2017 10:36 am

corn18 wrote:
Sat Dec 16, 2017 10:22 am
Image
Ok fair enough. But since this says, with respect to a State or local "income tax" imposed", it does appear to apply to property taxes. So at least there is still that.
Real Knowledge Comes Only From Experience

User avatar
LadyGeek
Site Admin
Posts: 49176
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: be careful, no longer allowed to prepay local and state taxes for a deduction

Post by LadyGeek » Sat Dec 16, 2017 10:36 am

I merged mouses' thread into here.
mouses wrote:
Sat Dec 16, 2017 7:23 am
Since the tax bill is like 99.99999% likely to pass, I hope this post doesn't get deleted as being speculative.
Forum policy is set by the site owners. We will wait until the bill is signed into law.

This thread has run its course and is locked. See: Political comments and proposed tax plan remain off-topic
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Locked