why split property tax payment with SALT limit; why itemize?

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inbox788
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why split property tax payment with SALT limit; why itemize?

Post by inbox788 » Sat Oct 27, 2018 6:46 pm

I just got my annual property tax bill with half a payment due in December and the other half in February. I've been paying both and deducting them in current year taxes. I'm in a high income tax state (CA) and with the SALT limit of $10k, I'm not seeing any reason to itemize when the standard deduction is $24k. My mortgage was recently paid off, so there's one less reason for me to itemize. My state income tax alone is over $10k and property tax is nearly $10k. I'm annoyed that I won't be able to deduct my charitable donations until after $24k, which seems unlikely now.

1) Is there any reason to split the payments across tax years?
2) Other than high mortgage interest, what are the most common remaining reasons why middle and higher middle income folks are going to itemize now? Same question for retirees.
3) I was itemizing some small property items (e.g. vehicle registration tax). Is that now moot?

inbox788
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Re: why split property tax payment with SALT limit; why itemize?

Post by inbox788 » Sat Oct 27, 2018 9:00 pm

Can anyone confirm if this is true for 2018 California Tax Return if I don't itemize Federal Tax Return? I might have to collect and report all the small itemization deduction items after all to optimize state tax return.
Itemize Deductions on the State Level
If the itemized deductions for your state income tax return equate to less than your federal standard deduction, you could itemize on your state taxes, but wouldn't necessarily want to itemize on your federal taxes. California, for example, allows taxpayers to itemize on their state taxes, whether or not they itemize on their federal return. Since each state has its own tax rules and allowable deductions, check with your state's department of revenue for current procedures on itemizing at the state level, and what that means for your federal tax return.
https://pocketsense.com/can-itemize-sta ... 21575.html

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jeffyscott
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Re: why split property tax payment with SALT limit; why itemize?

Post by jeffyscott » Sat Oct 27, 2018 9:24 pm

I don't itemize and pay property taxes in installments, as they are due. In my case, it's 3 payments in Jan, Mar, May. I don't see any reason to pay early.
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annielouise
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Re: why split property tax payment with SALT limit; why itemize?

Post by annielouise » Sat Oct 27, 2018 9:54 pm

1) You may want to split the payments so you can keep your money longer and collect the interest.

2) Single people also have the $10k SALT limit, but a much lower standard deduction, so many of them will still itemize. (About 45% of American adults are single.). Another reason to itemize would be post tax medical expenses, something that many retirees have. People who bunch charitable donations, perhaps with a donor advised fund, may still itemize in some years.

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Re: why split property tax payment with SALT limit; why itemize?

Post by ladycat » Sat Oct 27, 2018 10:06 pm

inbox788 wrote:
Sat Oct 27, 2018 9:00 pm
Can anyone confirm if this is true for 2018 California Tax Return if I don't itemize Federal Tax Return? I might have to collect and report all the small itemization deduction items after all to optimize state tax return.
Itemize Deductions on the State Level
If the itemized deductions for your state income tax return equate to less than your federal standard deduction, you could itemize on your state taxes, but wouldn't necessarily want to itemize on your federal taxes. California, for example, allows taxpayers to itemize on their state taxes, whether or not they itemize on their federal return. Since each state has its own tax rules and allowable deductions, check with your state's department of revenue for current procedures on itemizing at the state level, and what that means for your federal tax return.
https://pocketsense.com/can-itemize-sta ... 21575.html
Yes, you can itemize on your CA return even if you don't itemize on your federal return.

ofckrupke
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Re: why split property tax payment with SALT limit; why itemize?

Post by ofckrupke » Sat Oct 27, 2018 10:11 pm

inbox788 wrote:
Sat Oct 27, 2018 6:46 pm
1) Is there any reason to split the payments across tax years?
It depends. If (neglecting the smaller deduction items)
a) the full assessment is presented in the fall and
b) the annual property tax assessment is more than 2/3 and less then twice the state's standard deduction for your filing status,
then in alternate years you can pay early for the subsequent Feb to bunch three half-payments in one calendar year (then itemize for state)...taking the standard deduction for the year in which only a single half-payment was made .

Ron Ronnerson
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Re: why split property tax payment with SALT limit; why itemize?

Post by Ron Ronnerson » Sun Oct 28, 2018 11:59 am

We're planning to itemize on state taxes and take the standard deduction on federal. For this reason, I'm still keeping track of small stuff like vehicle property tax and small donations to Goodwill.

I paid installment 1 of my property tax bill yesterday and plan to pay the 2nd installment in December. Each installment is $4950 in our case (Bay Area home). The reason I'm paying the 2nd installment early is that I expect to be in a lower state tax bracket next year.

I'm not sure what you consider middle income folks but I find that California taxes, in our case, are actually very low. This year, on a gross income of $133k, we expect to pay around $1700 in state taxes after deductions and exemptions. We'll be in the 6% bracket this year. Next year, our gross income should go down somewhat (maybe around $120k) but our plan is to increase retirement contributions. Our income tax liability should be around $100 for the year after deductions and exemptions (family of three people). Most of our taxable income will be taxed at 1% or 2% and the last $2k of income will be taxed at 4%. If we increased retirement contributions by another $2k above what we're planning, we'd be in the 2% bracket and state tax liability for the year would be around $30.

Paying the 2nd installment in December instead of January should save us around $150-$200 in state taxes.

Traveler
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Re: why split property tax payment with SALT limit; why itemize?

Post by Traveler » Sun Oct 28, 2018 12:18 pm

As a single person with a relatively decent income but low property taxes, my SALT is right at $10K. I bunch charitable donations so that every other year I can itemize and the odd years I will use the std deduction. The SALT limit of $10K per return is one area that actually benefits single taxpayers - in many cases I feel like we get the short end of the stick.

inbox788
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Re: why split property tax payment with SALT limit; why itemize?

Post by inbox788 » Sun Oct 28, 2018 12:58 pm

ofckrupke wrote:
Sat Oct 27, 2018 10:11 pm
inbox788 wrote:
Sat Oct 27, 2018 6:46 pm
1) Is there any reason to split the payments across tax years?
It depends. If (neglecting the smaller deduction items)
a) the full assessment is presented in the fall and
b) the annual property tax assessment is more than 2/3 and less then twice the state's standard deduction for your filing status,
then in alternate years you can pay early for the subsequent Feb to bunch three half-payments in one calendar year (then itemize for state)...taking the standard deduction for the year in which only a single half-payment was made .
Brilliant! I've looked into lumping into every other year for federal tax considerations, but the state limits and benefits were largely ignored. Now it looks like some actionable issues are as large if not larger at the state level.

Folks from California and other similar states should be looking to see if they thread the needle on this strategy that can save them a few hundred in taxes every year. I think it helps those on the lower end of the range the most. I'll have to see what else goes in the state tax deductible form, but it's a little complicated. I'll have to look at each item or just let the software or accountant take care of it. As far as I can tell, I don't think there's any harm trying to lump payments.
Line 38 – Federal Itemized Deductions
Enter the total amount of itemized deductions from your federal Schedule A
(Form 1040), Itemized Deductions, lines 4, 9, 15, 19, 20, 27, and 28.
Important: If you did not itemize deductions on your federal tax return but
will itemize deductions on your California tax return, first complete and attach
federal Schedule A (Form 1040).
Then complete Schedule CA (540), Part II,
line 38 through line 44.
https://www.ftb.ca.gov/forms/2017/17_540cains.pdf

I've wondered about the reason for the $7000 homeowner exemption, and it looks like it was enacted at a time when the amount was more meaningful, but not adjusting for inflation has made the amount fairly irrelevant. It's not clear whether this was by design or something they planned to revisit, but some of the limits we are encountering today will also be rendered less relevant by inflation years and decades from now.
http://www.berkeleydailyplanet.com/issu ... icle/46401

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Artsdoctor
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Re: why split property tax payment with SALT limit; why itemize?

Post by Artsdoctor » Sun Oct 28, 2018 1:04 pm

Inbox,

From what I understand, we can continue to itemize on the CA return while taking the (newer, higher) standard deduction on the federal return.

Bunching your real estate tax won't benefit you on the federal return, although you might have to do some arithmetic to see if it would benefit you on your state return.

This year will be the first time in decades that we won't itemize on the federal form. Regarding your charitable contributions, I can tell you what we did. We contributed very heavily to our DAF last year which will be enough for at least 2-3 years of donations. We'll take the standard deduction this year, and then we may choose to transfer over appreciated shares into the DAF next year (again which should be enough for 2-3 years). This will all depend on how the market does since it may not be worthwhile to transfer appreciated shares over next year if there is a substantial selloff, although I still think it will most likely be worth it.

I don't think we will really know what's going on until we start playing with the new tax software programs at the end of the year. I have heard that CPAs are scrambling and that letters from the IRS are flying since there appears to be an inordinate need for clarification, but we suspected that would happen for obvious reasons.

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baconavocado
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Re: why split property tax payment with SALT limit; why itemize?

Post by baconavocado » Sun Oct 28, 2018 1:11 pm

ladycat wrote:
Sat Oct 27, 2018 10:06 pm
inbox788 wrote:
Sat Oct 27, 2018 9:00 pm
Can anyone confirm if this is true for 2018 California Tax Return if I don't itemize Federal Tax Return? I might have to collect and report all the small itemization deduction items after all to optimize state tax return.
Itemize Deductions on the State Level
If the itemized deductions for your state income tax return equate to less than your federal standard deduction, you could itemize on your state taxes, but wouldn't necessarily want to itemize on your federal taxes. California, for example, allows taxpayers to itemize on their state taxes, whether or not they itemize on their federal return. Since each state has its own tax rules and allowable deductions, check with your state's department of revenue for current procedures on itemizing at the state level, and what that means for your federal tax return.
https://pocketsense.com/can-itemize-sta ... 21575.html
Yes, you can itemize on your CA return even if you don't itemize on your federal return.
Maybe this will all be built into Turbotax Fed/State? E.g., enter all your deductions and let Tt decide the correct option, std deduction/itemize, for each return?

However, it will be complicated if different tax payment strategies apply to each return.

stan1
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Re: why split property tax payment with SALT limit; why itemize?

Post by stan1 » Sun Oct 28, 2018 1:23 pm

2018 CA standard deduction for married/head of household/widow(er) is $8802. Single is $4401.

For married/HoH/widow(er) who don't have large mortgage interest deductions agree lumping property tax and charitable contributions in alternate years would often make sense. Also, might be a reason to buy expensive new vehicles in late January so that you could elect to pay registration fees in December of the current tax year or January of the next tax year.

All tax software should be set up to let you know whether to itemize or take the standard deduction on federal and state returns, but agree a "trust but verify" approach is best.

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Re: why split property tax payment with SALT limit; why itemize?

Post by ladycat » Sun Oct 28, 2018 1:31 pm

stan1 wrote:
Sun Oct 28, 2018 1:23 pm
2018 CA standard deduction for married/head of household/widow(er) is $8802. Single is $4401.

For married/HoH/widow(er) who don't have large mortgage interest deductions agree lumping property tax and charitable contributions in alternate years would often make sense. Also, might be a reason to buy expensive new vehicles in late January so that you could elect to pay registration fees in December of the current tax year or January of the next tax year.

All tax software should be set up to let you know whether to itemize or take the standard deduction on federal and state returns, but agree a "trust but verify" approach is best.
I was just going to post the amounts, but here's a link for confirmation of the standard deduction amounts. https://www.ftb.ca.gov/forms/2018-Calif ... ions.shtml

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grabiner
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Re: why split property tax payment with SALT limit; why itemize?

Post by grabiner » Sun Oct 28, 2018 5:18 pm

baconavocado wrote:
Sun Oct 28, 2018 1:11 pm
ladycat wrote:
Sat Oct 27, 2018 10:06 pm
inbox788 wrote:
Sat Oct 27, 2018 9:00 pm
Can anyone confirm if this is true for 2018 California Tax Return if I don't itemize Federal Tax Return? I might have to collect and report all the small itemization deduction items after all to optimize state tax return.
Itemize Deductions on the State Level
If the itemized deductions for your state income tax return equate to less than your federal standard deduction, you could itemize on your state taxes, but wouldn't necessarily want to itemize on your federal taxes. California, for example, allows taxpayers to itemize on their state taxes, whether or not they itemize on their federal return. Since each state has its own tax rules and allowable deductions, check with your state's department of revenue for current procedures on itemizing at the state level, and what that means for your federal tax return.
https://pocketsense.com/can-itemize-sta ... 21575.html
Yes, you can itemize on your CA return even if you don't itemize on your federal return.
Maybe this will all be built into Turbotax Fed/State? E.g., enter all your deductions and let Tt decide the correct option, std deduction/itemize, for each return?

However, it will be complicated if different tax payment strategies apply to each return.
Tax software will compute your itemized deductions and then take the standard deduction if that is larger, and carry the necessary items over to the state return.

However, if you live in a state in which you must itemize federal taxes to itemize state taxes, or must take the federal standard deduction to take the state standard deduction, your tax software can't tell you what to do on the federal return because it hasn't yet done the state return. After you have done both federal and state returns, you can see what happens if you change your federal return; the software does give you the option to itemize federal taxes even if the standard deduction is larger.

(edited to fix quoting)
Last edited by grabiner on Sun Oct 28, 2018 7:26 pm, edited 1 time in total.
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inbox788
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Re: why split property tax payment with SALT limit; why itemize?

Post by inbox788 » Sun Oct 28, 2018 7:18 pm

Ron Ronnerson wrote:
Sun Oct 28, 2018 11:59 am
...We'll be in the 6% bracket this year. Next year, our gross income should go down somewhat (maybe around $120k) but our plan is to increase retirement contributions. Our income tax liability should be around $100 for the year after deductions and exemptions (family of three people). Most of our taxable income will be taxed at 1% or 2% and the last $2k of income will be taxed at 4%. If we increased retirement contributions by another $2k above what we're planning, we'd be in the 2% bracket and state tax liability for the year would be around $30.

Paying the 2nd installment in December instead of January should save us around $150-$200 in state taxes.
Don't know how you're figuring tax bracket with those incomes, but the effect of lumping tax deductions is around that much. I quickly mocked up the table below, so please let me know if it's incorrect. Peak benefit occurs around $9000 in deductible for a benefit of around $400 every 2 years. My accountant is a little inflexible, so I may have to try to explain this strategy to him, or maybe I'll forgo his services and pay for some software instead.

Headers are a little messed up, but just focus on column 3 (total annual deductions) and the last 2 columns (additional deductions by lumping and dollars if using 9.3% tax rate). As ofckrupke stated above, there's no benefit if less than 2/3 or more than twice the standard deduction.

Code: Select all

1.5X DEDUCTIONS	0.5X DEDUCTIONS	DEDUCTIONS		1.5X Max (Standard, Itemized)	0.5X Max (Standard, Itemized)		gap	gap			gap if no lumping	double above		ADDITIONAL deductible BENEFIT OF LUMPING	Actual difference if in 9.3% tax bracket
				8802	8802										
6000	2000	4000	4000	8802	8802		2802	6802	9604		4802	9604			
7500	2500	5000	5000	8802	8802		1302	6302	7604		3802	7604			
9000	3000	6000	6000	9000	8802		0	5802			2802	5604		198	18.414
10500	3500	7000	7000	10500	8802		0	5302			1802	3604		1698	157.914
12000	4000	8000	8000	12000	8802		0	4802			802	1604		3198	297.414
13500	4500	9000	9000	13500	8802		0	4302			0	0		4302	400.086
15000	5000	10000	10000	15000	8802		0	3802			0	0		3802	353.586
16500	5500	11000	11000	16500	8802		0	3302			0	0		3302	307.086
18000	6000	12000	12000	18000	8802		0	2802			0	0		2802	260.586
19500	6500	13000	13000	19500	8802		0	2302			0	0		2302	214.086
21000	7000	14000	14000	21000	8802		0	1802			0	0		1802	167.586
22500	7500	15000	15000	22500	8802		0	1302			0	0		1302	121.086
24000	8000	16000	16000	24000	8802		0	802			0	0		802	74.586
25500	8500	17000	17000	25500	8802		0	302			0	0		302	28.086
27000	9000	18000	18000	27000	9000		0	0			0	0		0	0

Ron Ronnerson
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Re: why split property tax payment with SALT limit; why itemize?

Post by Ron Ronnerson » Sun Oct 28, 2018 9:15 pm

inbox788 wrote:
Sun Oct 28, 2018 7:18 pm
Ron Ronnerson wrote:
Sun Oct 28, 2018 11:59 am
...We'll be in the 6% bracket this year. Next year, our gross income should go down somewhat (maybe around $120k) but our plan is to increase retirement contributions. Our income tax liability should be around $100 for the year after deductions and exemptions (family of three people). Most of our taxable income will be taxed at 1% or 2% and the last $2k of income will be taxed at 4%. If we increased retirement contributions by another $2k above what we're planning, we'd be in the 2% bracket and state tax liability for the year would be around $30.

Paying the 2nd installment in December instead of January should save us around $150-$200 in state taxes.
Don't know how you're figuring tax bracket with those incomes, but the effect of lumping tax deductions is around that much
I'm not an expert on this stuff so all I'll say about your table is that it looks awesome. I'll answer the question about my tax bracket, though.

Here are our projected numbers for 2019:
Gross Income of $120k ($106k from my income, 13k from wife working a side job, plus another $1k from interest)
Above Line Deductions: $56k (11k toward pension, 2k for dental premiums taken from paycheck, 19k to 457b, 15k to 403b, 4k to tIRA, 4k for dependent care FSA, $1k for health FSA)
AGI: 64k (120k-56k)
Itemized Deductions for CA State Taxes: $22k (roughly 12k in mortgage interest and 10k in property taxes)
Taxable Income: $42k
Tax at 1%: 17,088 x 0.01 = $171
Tax at 2%: (40,510-17,088) x 0.02 = $468
Tax at 4%: $(42,000-40,510) x 0.04 = $60
Total Tax: $699
CA exemptions credits for Married Filing Jointly with 1 Dependent: $603
Tax: $100

I believe the numbers above are correct but am not 100% positive. Please correct me if something looks off.

inbox788
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Re: why split property tax payment with SALT limit; why itemize?

Post by inbox788 » Sun Oct 28, 2018 9:56 pm

Ron Ronnerson wrote:
Sun Oct 28, 2018 9:15 pm
Above Line Deductions: $56k (11k toward pension, 2k for dental premiums taken from paycheck, 19k to 457b, 15k to 403b, 4k to tIRA, 4k for dependent care FSA, $1k for health FSA)
Itemized Deductions for CA State Taxes: $22k (roughly 12k in mortgage interest and 10k in property taxes)
Taxable Income: $42k
That's a lot of above the line deductions, which I wasn't thinking about. Your $22k in itemized deductions makes it outside the sweet spot around $6-7k to $15k where lumping makes sense alone. Your main benefit next year seems to be coming from delaying and paying taxes at a lower marginal rate. So when your mortgage interest goes down a bit (and/or the standard deduction increases), you may begin to think about tweaking Dec vs Jan property taxes again beyond shifting marginal tax rate.

FWIW, I started with using last years deduction and ending up with slightly lower amounts, so the benefit might scale with increasing standard deduction. I have mixed feelings about trying to maximize these small to moderate benefits against the simplification of just eliminating them entirely and not adding complications for a few bucks. These state opportunities were probably available before, but because the effects of the federal return was dominant, they were largely ignored. But now that there are few federal reasons to itemize (thanks for those that mentioned a few remaining cases), there's more time to look at the state return to optimize.

Ron Ronnerson
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Re: why split property tax payment with SALT limit; why itemize?

Post by Ron Ronnerson » Sun Oct 28, 2018 10:34 pm

inbox788 wrote:
Sun Oct 28, 2018 9:56 pm
Ron Ronnerson wrote:
Sun Oct 28, 2018 9:15 pm
Above Line Deductions: $56k (11k toward pension, 2k for dental premiums taken from paycheck, 19k to 457b, 15k to 403b, 4k to tIRA, 4k for dependent care FSA, $1k for health FSA)
Itemized Deductions for CA State Taxes: $22k (roughly 12k in mortgage interest and 10k in property taxes)
Taxable Income: $42k
That's a lot of above the line deductions, which I wasn't thinking about. Your $22k in itemized deductions makes it outside the sweet spot around $6-7k to $15k where lumping makes sense alone. Your main benefit next year seems to be coming from delaying and paying taxes at a lower marginal rate. So when your mortgage interest goes down a bit (and/or the standard deduction increases), you may begin to think about tweaking Dec vs Jan property taxes again beyond shifting marginal tax rate.

FWIW, I started with using last years deduction and ending up with slightly lower amounts, so the benefit might scale with increasing standard deduction. I have mixed feelings about trying to maximize these small to moderate benefits against the simplification of just eliminating them entirely and not adding complications for a few bucks. These state opportunities were probably available before, but because the effects of the federal return was dominant, they were largely ignored. But now that there are few federal reasons to itemize (thanks for those that mentioned a few remaining cases), there's more time to look at the state return to optimize.
Yes, I also used to largely ignore state taxes when it came to timing when to make property tax payments since federal returns used to be so dominant in the consideration. I agree that focusing more on state tax returns makes sense now and can provide opportunities to optimize.

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Re: why split property tax payment with SALT limit; why itemize?

Post by SurfCityBill » Tue Oct 30, 2018 12:40 pm

I'm in the same boat you are. I see no reason to accelerate the CA prop tax payment due Apr 19 to end Dec 18 anymore. I also do not expect to itemize after doing so for decades.

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Re: why split property tax payment with SALT limit; why itemize?

Post by CAsage » Tue Oct 30, 2018 2:11 pm

I used to pay all the CA property taxes each year when I got the bill. From now on .... I will pay the first payment on time in November, then pay the 2nd payment in February AND both 2019 payments next fall. Repeat every other year. I also super-funded a DAF in 2017 so I could deduct it... but should that need replenishing I will pick the odd years. And all my Goodwill/etc donations are going in January 2019, not 2018! There wasn't anything else I could think of to do....
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