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
jebmke
Posts: 7023
Joined: Thu Apr 05, 2007 2:44 pm

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

Post by jebmke » Thu Dec 07, 2017 8:53 am

Chip wrote:
Thu Dec 07, 2017 7:09 am
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 will play devils advocate here. The estimated payment is not an imposed tax. Obviously there are consequences (penalties and interest) for lack of timely payments but they are not a tax. So the question still remains whether the payment is allowed for a deduction on Federal. By the time you file your federal tax, your state tax for the prior year has been imposed, therefore, reasonable estimates used to make payments in 2017 for 2017 seem OK. I really don't have a strong opinion one way or another on payments for 2018. I haven't looked into it much since I am going a different direction (a large DAF donation) since that payment is deductible for both Federal and State purposes whereas a pre-payment of 2018 wouldn't help me on my state income taxes.
When you discover that you are riding a dead horse, the best strategy is to dismount.

User avatar
CollegePrudens
Posts: 86
Joined: Mon Oct 16, 2017 10:43 pm
Location: SF Bay Area

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

Post by CollegePrudens » Thu Dec 07, 2017 10:04 am

Thesaints wrote:
Thu Dec 07, 2017 12:56 am
Go on the ftb.ca website. Make an estimated payment of $10k for 2018 (you can choose 2018 on the pulldown menu).
<SNIP>
Where is the pulldown menu with payment option for 2018 on the CA FTB site? I am looking at the home page for CA FTB (https://www.ftb.ca.gov/) and don't seem to see it.
Live as if you were to die tomorrow; learn as if you were to live forever - Gandhi

DrGoogle2017
Posts: 706
Joined: Mon Aug 14, 2017 12:31 pm

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

Post by DrGoogle2017 » Thu Dec 07, 2017 10:32 am

I wonder if you have to register to pay 2018.

mikep
Posts: 3621
Joined: Wed Apr 22, 2009 9:27 pm

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

Post by mikep » Thu Dec 07, 2017 12:33 pm

I see 2018 without registrering. Go through Web pay/ individuals / fill out the info / form 540-ES. 2015-2018 show up in the dropdown boxes.

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

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

Post by Chip » Thu Dec 07, 2017 2:05 pm

jebmke wrote:
Thu Dec 07, 2017 8:53 am
I will play devils advocate here. The estimated payment is not an imposed tax. Obviously there are consequences (penalties and interest) for lack of timely payments but they are not a tax. So the question still remains whether the payment is allowed for a deduction on Federal. By the time you file your federal tax, your state tax for the prior year has been imposed, therefore, reasonable estimates used to make payments in 2017 for 2017 seem OK. I really don't have a strong opinion one way or another on payments for 2018.
Thanks for weighing in.

Let me make sure I'm following you. There is a standard (that I've read "somewhere") that you cannot deduct a payment for a tax that wasn't imposed on you. And since the estimated payment is not an "imposed tax", there is essentially an exception to the "imposed tax" deductibility rule that allows a deduction for estimated tax payments?

Or did I just dive down the rabbit hole? :P

jebmke
Posts: 7023
Joined: Thu Apr 05, 2007 2:44 pm

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

Post by jebmke » Thu Dec 07, 2017 3:36 pm

Chip wrote:
Thu Dec 07, 2017 2:05 pm
Let me make sure I'm following you. There is a standard (that I've read "somewhere") that you cannot deduct a payment for a tax that wasn't imposed on you. And since the estimated payment is not an "imposed tax", there is essentially an exception to the "imposed tax" deductibility rule that allows a deduction for estimated tax payments?
Pub 17, page 151 states that there are two conditions which must be met. One, the tax must be imposed on you and two, the tax must be paid. It does not speak to the year. However, it does go on
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.
Example. You made an estimated state income
tax payment. However, the estimate of
your state tax liability shows that you will get a
refund of the full amount of your estimated payment.
You had no reasonable basis to believe
you had any additional liability for state income
taxes and you can’t deduct the estimated tax
payment.
If I were arguing against deducting 2018 I would argue that the tax had not been imposed. Plus, the example in the above citation would seem to mean that you can't just load up 2017 estimates either without having some reasonable support.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Thesaints
Posts: 1068
Joined: Tue Jun 20, 2017 12:25 am

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

Post by Thesaints » Thu Dec 07, 2017 3:40 pm

No need to register.
Use Webpay and follow instructions. You've gotta enter your personal info, though.

https://www.ftb.ca.gov/online/webpay/in ... _WebPayIND

When is a tax "imposed" ? Estimated tax payments are due before the end of the quarter they refer to, for instance.
And we know for a fact that paying in 2017 personal property taxes with a due date in 2018 is kosher.

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

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

Post by Chip » Thu Dec 07, 2017 4:17 pm

jebmke wrote:
Thu Dec 07, 2017 3:36 pm
Pub 17, page 151 states that there are two conditions which must be met. One, the tax must be imposed on you and two, the tax must be paid. It does not speak to the year.
I hesitate to bring this up because it may sound a little crazy but I really don't think I know for sure what the words "imposed on you" mean in the code. The example in Pub 17 seems to indicate that imposed means the tax must apply to you vs. someone else. Versus a current tax liability, which seems more like the way you are using it. The Pub 17 example for "imposed" is that only the owner of a property can deduct the property taxes paid on that property. There seem to be other examples in IRS pubs where it seems to me to simply mean "subject to the tax".
If I were arguing against deducting 2018 I would argue that the tax had not been imposed. Plus, the example in the above citation would seem to mean that you can't just load up 2017 estimates either without having some reasonable support.
I think it's clear from a Tax Court case revenue ruling that making estimated payments without a good faith estimate of a future liability is grounds for disallowance of the deduction.

Edit: corrected Tax Court case to revenue ruling
Last edited by Chip on Fri Dec 08, 2017 11:02 am, edited 1 time in total.

jebmke
Posts: 7023
Joined: Thu Apr 05, 2007 2:44 pm

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

Post by jebmke » Thu Dec 07, 2017 4:36 pm

Chip wrote:
Thu Dec 07, 2017 4:17 pm
jebmke wrote:
Thu Dec 07, 2017 3:36 pm
Pub 17, page 151 states that there are two conditions which must be met. One, the tax must be imposed on you and two, the tax must be paid. It does not speak to the year.
I hesitate to bring this up because it may sound a little crazy but I really don't think I know for sure what the words "imposed on you" mean in the code. The example in Pub 17 seems to indicate that imposed means the tax must apply to you vs. someone else. Versus a current tax liability, which seems more like the way you are using it. The Pub 17 example for "imposed" is that only the owner of a property can deduct the property taxes paid on that property. There seem to be other examples in IRS pubs where it seems to me to simply mean "subject to the tax".
If I were arguing against deducting 2018 I would argue that the tax had not been imposed. Plus, the example in the above citation would seem to mean that you can't just load up 2017 estimates either without having some reasonable support.
I think it's clear from a Tax Court case that making estimated payments without a good faith estimate of a future liability is grounds for disallowance of the deduction.
I agree on the lack of clarity on what "imposed" means. That is why I originally said I don't have a position one way or another. There may be cases that clear it up or it may be defined in the code. I punted the issue personally because I am taking a different approach. If I learn anything new I'll post back.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Thesaints
Posts: 1068
Joined: Tue Jun 20, 2017 12:25 am

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

Post by Thesaints » Thu Dec 07, 2017 4:37 pm

Chip wrote:
Thu Dec 07, 2017 4:17 pm
I hesitate to bring this up because it may sound a little crazy but I really don't think I know for sure what the words "imposed on you" mean in the code. The example in Pub 17 seems to indicate that imposed means the tax must apply to you vs. someone else. Versus a current tax liability, which seems more like the way you are using it. The Pub 17 example for "imposed" is that only the owner of a property can deduct the property taxes paid on that property. There seem to be other examples in IRS pubs where it seems to me to simply mean "subject to the tax".
Absolutely. In the following text it specifies that "imposed" means "imposed on you" as opposed to "imposed on someone else". They make the example of someone paying for someone else's property taxes.
If I were arguing against deducting 2018 I would argue that the tax had not been imposed. Plus, the example in the above citation would seem to mean that you can't just load up 2017 estimates either without having some reasonable support.
Here instead it looks like "imposed" is used meaning "calculated in some way and a bill has been presented". But this is not the IRS writing; it is a BH member instead. Not sure how much it counts.
I think it's clear from a Tax Court case that making estimated payments without a good faith estimate of a future liability is grounds for disallowance of the deduction.
If I think in good faith that I will lose my job (and therefore miss tax withholdings) can I pay 4 quarters of estimated tax all together ? I kind of don't trust me to have all that cash available and not spend it in trinkets.

mikep
Posts: 3621
Joined: Wed Apr 22, 2009 9:27 pm

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

Post by mikep » Fri Dec 08, 2017 1:15 am

Has anyone asked the IRS or FTB about this? Why would the CA FTB make 2018 an option if federal deductions aren't allowed from it.. just to collect their money as soon as possible? Why not 2019 or 2020?

I'm still on the fence on this one..there's really not much downside to try. Next year will be a standard deduction for me no matter what happens. If next year's state taxes aren't deductible anyway I really don't lose anything other than interest from paying the state so early. If a revelation comes after the first of the year that this sort of thing is deductible it's too late to do at that point. If it comes that its not allowed all I need to do is not deduct the payment made, zero out my withholdings and slowly collect my money back.

I guess thats why I got the H&R Block at home audit support.. I guess I'll ask them and probably go with their recommendation. They would pay the penalties and interest if they are wrong, so might as well use them.

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

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

Post by Chip » Fri Dec 08, 2017 4:02 am

Thesaints wrote:
Thu Dec 07, 2017 4:37 pm
If I think in good faith that I will lose my job (and therefore miss tax withholdings) can I pay 4 quarters of estimated tax all together ? I kind of don't trust me to have all that cash available and not spend it in trinkets.
If you lose your job you're probably not going to be needing to do any withholding due to lack of income. :P

Thesaints
Posts: 1068
Joined: Tue Jun 20, 2017 12:25 am

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

Post by Thesaints » Fri Dec 08, 2017 10:40 am

Not necessarily :wink:
CnC wrote:
Thu Dec 07, 2017 1:48 pm
Hey all CnC here and I just had a question for the older more well off Bogle Heads.


How old were you when your investments Grew more in a year than your households 'Gross' income.

We all know that making more money makes it easier to have a larger investment. But, this puts everyone on a more level playing field because it takes a lot less for a truck driver to beat his 60k income for the year than it does for a doctor to beat his 400k a year income.

So community I ask you, at what point did your investments surpass working? It can be a 1 off time in a good market or anything.

Right now we are a ways off since ours is only making 1/4 our household income but I look forward to hearing catching up with me.

bsteiner
Posts: 2938
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

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

Post by bsteiner » Fri Dec 08, 2017 10:50 am

The payment is only deductible if it's a reasonable estimate of taxes owed. Revenue Ruling 82-208, 1982-2 C.B. 58, http://www.legalbitstream.com/scripts/i ... l4c6/2/doc.

In Revenue Ruling 82-208, the taxpayer paid $11,000 of state income taxes in December 1981 even though he had no reasonable basis to believe he would owe the money. He received a refund of the $11,000 in 1982. Presumably he did this because under the Economic Recovery Tax Act of 1981, the tax rates would be lower in 1982, so he wanted the deduction at the 1981 rates and the income at the lower 1982 rates.

However, the IRS held that he was not entitled to the deduction in 1981.

Thesaints
Posts: 1068
Joined: Tue Jun 20, 2017 12:25 am

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

Post by Thesaints » Fri Dec 08, 2017 10:56 am

My yearly expenses are maybe 60/70k after taxes. If I lose my job that has to come from investments, which means selling some of them and having to front taxes on CG. In addition, my investments already produce 20k of taxable distribution yearly. Thanks to my job withholdings I don’t have to make estimated tax payments, but once those go away...

Does this faith sound good enough to you guys ?

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

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

Post by Chip » Fri Dec 08, 2017 10:59 am

bsteiner wrote:
Fri Dec 08, 2017 10:50 am
In Revenue Ruling 82-208, the taxpayer paid $11,000 of state income taxes in December 1981 even though he had no reasonable basis to believe he would owe the money. He received a refund of the $11,000 in 1982. Presumably he did this because under the Economic Recovery Tax Act of 1981, the tax rates would be lower in 1982, so he wanted the deduction at the 1981 rates and the income at the lower 1982 rates.

However, the IRS held that he was not entitled to the deduction in 1981.
Thanks, Bruce. Do you know of any rulings where a deduction was denied simply because the estimated taxes were paid in a tax year prior to them being due? e.g. paying an estimate in 2017 for 2018 state taxes, where there is a good faith estimate of those 2018 taxes.

bsteiner
Posts: 2938
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

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

Post by bsteiner » Fri Dec 08, 2017 11:06 am

Chip wrote:
Fri Dec 08, 2017 10:59 am
bsteiner wrote:
Fri Dec 08, 2017 10:50 am
In Revenue Ruling 82-208, the taxpayer paid $11,000 of state income taxes in December 1981 even though he had no reasonable basis to believe he would owe the money. He received a refund of the $11,000 in 1982. Presumably he did this because under the Economic Recovery Tax Act of 1981, the tax rates would be lower in 1982, so he wanted the deduction at the 1981 rates and the income at the lower 1982 rates.

However, the IRS held that he was not entitled to the deduction in 1981.
Thanks, Bruce. Do you know of any rulings where a deduction was denied simply because the estimated taxes were paid in a tax year prior to them being due? e.g. paying an estimate in 2017 for 2018 state taxes, where there is a good faith estimate of those 2018 taxes.
The only relevant one that I found was TAM 9303003: http://www.legalbitstream.com/scripts/i ... l4d2/2/doc. That one allowed the deduction, though the tax was with respect to the earlier year but otherwise payable in the later year.

jebmke
Posts: 7023
Joined: Thu Apr 05, 2007 2:44 pm

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

Post by jebmke » Fri Dec 08, 2017 11:12 am

Only skimmed this quickly but these cases seem to be same year payments (e.g. 2017 not 2018).
When you discover that you are riding a dead horse, the best strategy is to dismount.

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

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

Post by Chip » Fri Dec 08, 2017 1:25 pm

bsteiner wrote:
Fri Dec 08, 2017 11:06 am
The only relevant one that I found was TAM 9303003: http://www.legalbitstream.com/scripts/i ... l4d2/2/doc. That one allowed the deduction, though the tax was with respect to the earlier year but otherwise payable in the later year.
Thanks, Bruce.

IANAL, but it seems one particularly relevant bit from the TAM is this:
TAM 9303003 wrote:The fact that the state authorities accepted the advance payment and credited it to the taxpayer's account was determined to be within the rule laid down by the United States Tax Court allowing a deduction for advance payments of state taxes under statutes authorizing the payment.

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

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

Post by Chip » Fri Dec 08, 2017 1:48 pm

jebmke wrote:
Fri Dec 08, 2017 11:12 am
Only skimmed this quickly but these cases seem to be same year payments (e.g. 2017 not 2018).
Correct. Apparently, long ago, there was a question whether estimated state tax payments made in a year could be deducted on the federal return in that tax year. I believe this was finally resolved in Rev. Rul. 71-190, which is perhaps why so many subsequent rulings cite it.

Following some leads from Bruce's post, I found this snippet from a very recent article from a partner at McDermott, Will & Emery, a law firm that appears to have a pretty heavyweight tax practice:
Peter L. Faber wrote:Could a taxpayer prepay his or her entire predicted 2018 state income tax liability in 2017 and get a deduction for it in 2017? Could the IRS challenge such a position based on a general argument that it would distort the taxpayer’s liability? The IRS has not addressed this issue in published guidance, but rulings suggest that a cash-basis taxpayer can deduct state income taxes when paid if the payments are based on a reasonable estimate of tax liability (Rev. Rul. 71-190, 1971-1 C.B. 70; Rev. Rul. 82-208, 1982-2 C.B. 58). Section 461 of the Internal Revenue Code, which generally addresses the timing of deductions, would not seem to apply to this situation. Of course, prepaying state or local income taxes could be done only if it were permitted by the laws of the applicable jurisdiction.
I'm thinking this opinion may be the closest we'll ever get to anything definitive.

After poking around a bit I think I have found something that deals with your idea, expressed earlier, that an estimated tax payment is not a tax. It appears they resolved that by declaring that an estimated payment based on a good faith estimate IS a tax. 8-)
Chief Counsel Memorandum 200814022 wrote:Section 164(a) provides for the deduction of the following taxes paid or accrued within the taxable year: (1) state and local real property taxes, (2) state and local personal property taxes, and (3) state and local income taxes. A payment of estimated income tax pursuant to state law constitutes the payment of a tax within the meaning of §164(a)(3) when the amount is based on a reasonable, good faith estimate of the taxpayer’s actual tax liability. See Rev. Rul. 71-190, 1971-1 C.B. 70; Rev. Rul. 82-208, 1982-2 C.B. 58.

pshonore
Posts: 5751
Joined: Sun Jun 28, 2009 2:21 pm

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

Post by pshonore » Fri Dec 08, 2017 2:06 pm

But is that estimated tax for the current tax year or the next tax year? If you can make a good faith estimate for the next year, why not the year after that and so on. In any case, unless your state accounts for the years properly (like CA evidently), it doesn't work. In most states, estimated payments for the current year aren't due until 4/15.

Thesaints
Posts: 1068
Joined: Tue Jun 20, 2017 12:25 am

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

Post by Thesaints » Fri Dec 08, 2017 2:12 pm

pshonore wrote:
Fri Dec 08, 2017 2:06 pm
But is that estimated tax for the current tax year or the next tax year? If you can make a good faith estimate for the next year, why not the year after that and so on. In any case, unless your state accounts for the years properly (like CA evidently), it doesn't work. In most states, estimated payments for the current year aren't due until 4/15.
Because your State won't accept the estimated payment. If they did, why not ? One can certainly make multi-year estimates. The entire economy relies on that.
Also, one cannot be forced to make payments only on or about the due date.

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

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

Post by Chip » Fri Dec 08, 2017 2:20 pm

pshonore wrote:
Fri Dec 08, 2017 2:06 pm
But is that estimated tax for the current tax year or the next tax year? If you can make a good faith estimate for the next year, why not the year after that and so on. In any case, unless your state accounts for the years properly (like CA evidently), it doesn't work. In most states, estimated payments for the current year aren't due until 4/15.
As noted in the quote from Faber, it not only has to be a good faith estimate but also has to be accepted by the state, which, from the rulings I've read, appears to be sufficient proof to the IRS that the payments are in accordance with state law.

Based on everything I've read, IF you could make a good faith estimate for future years, AND your state would accept it, it would be deductible. But I think it very unlikely that any state would accept a payment for 2020 taxes, for example.

I know from your prior postings that you don't like this conclusion. That's okay. It's certainly a gray area because, as Faber notes, the IRS has not addressed this issue in public guidance. Though he is a tax attorney and cites revenue rulings and code sections in support of his conclusion. Do you have any citations that argue AGAINST such a deduction?

pshonore
Posts: 5751
Joined: Sun Jun 28, 2009 2:21 pm

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

Post by pshonore » Fri Dec 08, 2017 3:08 pm

Chip wrote:
Fri Dec 08, 2017 2:20 pm
pshonore wrote:
Fri Dec 08, 2017 2:06 pm
But is that estimated tax for the current tax year or the next tax year? If you can make a good faith estimate for the next year, why not the year after that and so on. In any case, unless your state accounts for the years properly (like CA evidently), it doesn't work. In most states, estimated payments for the current year aren't due until 4/15.
As noted in the quote from Faber, it not only has to be a good faith estimate but also has to be accepted by the state, which, from the rulings I've read, appears to be sufficient proof to the IRS that the payments are in accordance with state law.

Based on everything I've read, IF you could make a good faith estimate for future years, AND your state would accept it, it would be deductible. But I think it very unlikely that any state would accept a payment for 2020 taxes, for example.

I know from your prior postings that you don't like this conclusion. That's okay. It's certainly a gray area because, as Faber notes, the IRS has not addressed this issue in public guidance. Though he is a tax attorney and cites revenue rulings and code sections in support of his conclusion. Do you have any citations that argue AGAINST such a deduction?
Not case of like or dislike. The whole concept does not make logical sense. But perhaps taxes are not logical to start with.

Thesaints
Posts: 1068
Joined: Tue Jun 20, 2017 12:25 am

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

Post by Thesaints » Fri Dec 08, 2017 3:38 pm

pshonore wrote:
Fri Dec 08, 2017 3:08 pm
Not case of like or dislike. The whole concept does not make logical sense.
Why ? The Federal Government has decided that amounts taxed away by states are not taxable (under certain conditions). That includes estimated payments for future years.
If one is wrong and overpays, then refunds are taxed in the year they are received.
What is illogical about it

pshonore
Posts: 5751
Joined: Sun Jun 28, 2009 2:21 pm

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

Post by pshonore » Fri Dec 08, 2017 4:22 pm

So if I had a $10K medical procedure (my net cost) scheduled for say Mar 2018 and I paid in Dec 2017, I could deduct on it on 2017 taxes?

Tanelorn
Posts: 1322
Joined: Thu May 01, 2014 9:35 pm

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

Post by Tanelorn » Fri Dec 08, 2017 5:13 pm

pshonore wrote:
Fri Dec 08, 2017 4:22 pm
So if I had a $10K medical procedure (my net cost) scheduled for say Mar 2018 and I paid in Dec 2017, I could deduct on it on 2017 taxes?
Perhaps relevant, suggesting this would be allowed under a general accounting treatment that prepaid expenses less than 12 months ahead can be taken in the year paid.

https://ttlc.intuit.com/questions/4136351

User avatar
LadyGeek
Site Admin
Posts: 41674
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

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

Post by LadyGeek » Fri Dec 08, 2017 5:14 pm

Also see: Publication 502 (2016), Medical and Dental Expenses | Internal Revenue Service "What Expenses Can You Include This Year?"
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.

User avatar
dual
Posts: 447
Joined: Mon Feb 26, 2007 7:02 pm

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

Post by dual » Fri Dec 08, 2017 5:27 pm

SALT Taxes?

I will add this redundant use of an acronym to my list with the perennial goodies:
IRA account
LCD display
VIN/PIN number
CVT transmission
UPC code
CRV value

most of these can be made double redundant!!
personal PIN number
California CRV value; CRV=California_Redemption_Value
State and Local SALT taxes

Shikoku
Posts: 82
Joined: Fri Oct 27, 2017 11:01 pm
Location: USA

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

Post by Shikoku » 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?
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

Thesaints
Posts: 1068
Joined: Tue Jun 20, 2017 12:25 am

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

Post by Thesaints » Fri Dec 08, 2017 7:26 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?
You can't just write a check to your county tax collector. In order to pay taxes a bill must have been generated, or there has to be a mechanism for estimated payments in place.
It would be like sending $65 to your city as advance payment of a future parking violation.

What one can do, instead, is paying all the tax billed this year, even those tranches with due date in 2018.

DrGoogle2017
Posts: 706
Joined: Mon Aug 14, 2017 12:31 pm

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

Post by DrGoogle2017 » Fri Dec 08, 2017 7:59 pm

I’ve been prepaying property tax for a few years now. But this thread is so helpful is that I didn’t think about prepaying my husband’s dental treatment next year. I know it’s going to be huge, I need to call the dentist soon.

crit
Posts: 355
Joined: Mon Jan 05, 2015 12:54 pm

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

Post by crit » Sat Dec 09, 2017 8:56 am

A question - I am thinking of prepaying. Our property taxes are paid through escrow by our mortgage holder. How do I coordinate that with them?

When I've accidentally paid the insurance bill when it showed up, the mortgage holder ends up sending us a repayment check a month later (because that is escrowed too), so I would want to avoid that song & dance if it then had tax implications.

MikeG62
Posts: 533
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

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

Post by MikeG62 » Sat Dec 09, 2017 9:43 am

Thesaints wrote:
Thu Dec 07, 2017 3:40 pm
...When is a tax "imposed" ? Estimated tax payments are due before the end of the quarter they refer to, for instance.
And we know for a fact that paying in 2017 personal property taxes with a due date in 2018 is kosher.
I am not sure we know this for a fact. People do it, but that does not mean it will survive audit. See section II of the attached (on pages 6 & 7):

https://ustaxcourt.gov/InOpHistoric/HOFFMAN.TCM.WPD.pdf

I am not saying I would not make the payment in 2017 and take the deduction in 2017, just that it does not seem to be without some level of risk.

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

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

Post by Chip » Sat Dec 09, 2017 10:13 am

MikeG62 wrote:
Sat Dec 09, 2017 9:43 am
Thesaints wrote:
Thu Dec 07, 2017 3:40 pm
...When is a tax "imposed" ? Estimated tax payments are due before the end of the quarter they refer to, for instance.
And we know for a fact that paying in 2017 personal property taxes with a due date in 2018 is kosher.
I am not sure we know this for a fact. People do it, but that does not mean it will survive audit. See section II of the attached (on pages 6 & 7):

https://ustaxcourt.gov/InOpHistoric/HOFFMAN.TCM.WPD.pdf

I am not saying I would not make the payment in 2017 and take the deduction in 2017, just that it does not seem to be without some level of risk.
I agree. Property taxes seem to be treated differently than state income taxes by the code, the courts and by revenue rulings. I feel comfortable prepaying my property taxes because they are assessed near the end of the year, before I pay them. When I do pay them at the end of this month the tax office will print out an invoice just like the one I would normally receive in February.

There was one year where the state couldn't get their act together, which somehow affected the ability of the county to get the right number by year end. I did pay based on an estimate that year, but wasn't as comfortable with it as in prior years. It also ended up creating a "recovery" item on my tax return when they refunded the slight overpayment the next year.

DrGoogle2017
Posts: 706
Joined: Mon Aug 14, 2017 12:31 pm

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

Post by DrGoogle2017 » Sat Dec 09, 2017 11:05 am

I have never had an audit. Did my own taxes for 40plus years. Somebody at work said he suspect the reason is I used TurboTax.

jebmke
Posts: 7023
Joined: Thu Apr 05, 2007 2:44 pm

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

Post by jebmke » Sat Dec 09, 2017 11:12 am

DrGoogle2017 wrote:
Sat Dec 09, 2017 11:05 am
I have never had an audit. Did my own taxes for 40plus years. Somebody at work said he suspect the reason is I used TurboTax.
More likely it is because you haven't had anything on your returns that triggers an audit. I have used TT and HRBlock and have had two audits but I had unusual items on the return which were the triggers.

Some of the triggers are changing as they get increasingly able to match electronic forms like 1099s and submitted tax returns. Schedule C and Line 21 income will likely be increasingly scrutinized.

Education credits will also be under increasing scrutiny as they push the institutions to clean up their weak accounting practices.
When you discover that you are riding a dead horse, the best strategy is to dismount.

User avatar
Leesbro63
Posts: 4914
Joined: Mon Nov 08, 2010 4:36 pm

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

Post by Leesbro63 » Sat Dec 09, 2017 12:04 pm

How about this one: Let's say you do prepay state income taxes in 2017 for tax year 2018. The state correctly applies the payment to 2018. And for any number of reasons, including some that are hypothetical and cannot be discussed here, you find out, in February of 2018, that you can and do want to deduct those state income taxes in 2018. Does the fact that you paid in 2017 REQUIRE that any deduction be taken only in tax year 2017. Or can you decide in Feb 2018 that, gee, I paid income tax to my state for tax year 2018, and it makes sense to take that deduction in 2018. (Assuming tax laws do not change).

User avatar
Leesbro63
Posts: 4914
Joined: Mon Nov 08, 2010 4:36 pm

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

Post by Leesbro63 » Sat Dec 09, 2017 12:05 pm

Leesbro63 wrote:
Sat Dec 09, 2017 12:04 pm
How about this one: Let's say you do prepay state income taxes in 2017 for tax year 2018. The state correctly applies the payment to 2018. And for any number of reasons, including some that are hypothetical and cannot be discussed here, you find out, in February of 2018, that you can and do want to deduct those state income taxes in 2018. Does the fact that you paid in 2017 REQUIRE that any deduction be taken only in tax year 2017. Or can you decide in Feb 2018 that, gee, I paid income tax to my state for tax year 2018, and it makes sense to take that deduction in 2018. (Assuming tax laws do not change).
In other words, can you have your cake (pay 2018 tax in 2017), then eat it too by kicking the decision about which year to take the tax deduction to (after) 1/1/18?

jebmke
Posts: 7023
Joined: Thu Apr 05, 2007 2:44 pm

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

Post by jebmke » Sat Dec 09, 2017 12:17 pm

As far as I know, taxes can only be deducted in the year they are paid. It is not clear whether 2018 taxes paid in 2017 can be deducted in 2017.
When you discover that you are riding a dead horse, the best strategy is to dismount.

DrGoogle2017
Posts: 706
Joined: Mon Aug 14, 2017 12:31 pm

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

Post by DrGoogle2017 » Sat Dec 09, 2017 12:20 pm

Leesbro63 wrote:
Sat Dec 09, 2017 12:05 pm
Leesbro63 wrote:
Sat Dec 09, 2017 12:04 pm
How about this one: Let's say you do prepay state income taxes in 2017 for tax year 2018. The state correctly applies the payment to 2018. And for any number of reasons, including some that are hypothetical and cannot be discussed here, you find out, in February of 2018, that you can and do want to deduct those state income taxes in 2018. Does the fact that you paid in 2017 REQUIRE that any deduction be taken only in tax year 2017. Or can you decide in Feb 2018 that, gee, I paid income tax to my state for tax year 2018, and it makes sense to take that deduction in 2018. (Assuming tax laws do not change).
In other words, can you have your cake (pay 2018 tax in 2017), then eat it too by kicking the decision about which year to take the tax deduction to (after) 1/1/18?
I know it’s hypothetical and we’re not allowed to discuss the new tax law, but it will be moot in 2018 if only property tax is allowed.

User avatar
Leesbro63
Posts: 4914
Joined: Mon Nov 08, 2010 4:36 pm

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

Post by Leesbro63 » Sat Dec 09, 2017 12:31 pm

DrGoogle2017 wrote:
Sat Dec 09, 2017 12:20 pm
Leesbro63 wrote:
Sat Dec 09, 2017 12:05 pm
Leesbro63 wrote:
Sat Dec 09, 2017 12:04 pm
How about this one: Let's say you do prepay state income taxes in 2017 for tax year 2018. The state correctly applies the payment to 2018. And for any number of reasons, including some that are hypothetical and cannot be discussed here, you find out, in February of 2018, that you can and do want to deduct those state income taxes in 2018. Does the fact that you paid in 2017 REQUIRE that any deduction be taken only in tax year 2017. Or can you decide in Feb 2018 that, gee, I paid income tax to my state for tax year 2018, and it makes sense to take that deduction in 2018. (Assuming tax laws do not change).
In other words, can you have your cake (pay 2018 tax in 2017), then eat it too by kicking the decision about which year to take the tax deduction to (after) 1/1/18?
I know it’s hypothetical and we’re not allowed to discuss the new tax law, but it will be moot in 2018 if only property tax is allowed.
In keeping with good Boglehead practice, let's assume nothing changes and we plan to use current law.

DrGoogle2017
Posts: 706
Joined: Mon Aug 14, 2017 12:31 pm

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

Post by DrGoogle2017 » Sat Dec 09, 2017 12:40 pm

Leesbro63 wrote:
Sat Dec 09, 2017 12:31 pm
DrGoogle2017 wrote:
Sat Dec 09, 2017 12:20 pm
Leesbro63 wrote:
Sat Dec 09, 2017 12:05 pm
Leesbro63 wrote:
Sat Dec 09, 2017 12:04 pm
How about this one: Let's say you do prepay state income taxes in 2017 for tax year 2018. The state correctly applies the payment to 2018. And for any number of reasons, including some that are hypothetical and cannot be discussed here, you find out, in February of 2018, that you can and do want to deduct those state income taxes in 2018. Does the fact that you paid in 2017 REQUIRE that any deduction be taken only in tax year 2017. Or can you decide in Feb 2018 that, gee, I paid income tax to my state for tax year 2018, and it makes sense to take that deduction in 2018. (Assuming tax laws do not change).
In other words, can you have your cake (pay 2018 tax in 2017), then eat it too by kicking the decision about which year to take the tax deduction to (after) 1/1/18?
I know it’s hypothetical and we’re not allowed to discuss the new tax law, but it will be moot in 2018 if only property tax is allowed.
In keeping with good Boglehead practice, let's assume nothing changes and we plan to use current law.
I agree but this whole thread was created to deal with the eliminating of the SALT taxes in the coming year. Normally, if you prepay something, you don’t get to deduct that the following year, so it’s a wash.

User avatar
Leesbro63
Posts: 4914
Joined: Mon Nov 08, 2010 4:36 pm

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

Post by Leesbro63 » Sat Dec 09, 2017 12:43 pm

It could also be for purposes of bunching deductions into every other year, a common tax strategy.

Nate79
Posts: 1457
Joined: Thu Aug 11, 2016 6:24 pm
Location: Portland, OR

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

Post by Nate79 » Sat Dec 09, 2017 1:06 pm

Leesbro63 wrote:
Sat Dec 09, 2017 12:31 pm
DrGoogle2017 wrote:
Sat Dec 09, 2017 12:20 pm
Leesbro63 wrote:
Sat Dec 09, 2017 12:05 pm
Leesbro63 wrote:
Sat Dec 09, 2017 12:04 pm
How about this one: Let's say you do prepay state income taxes in 2017 for tax year 2018. The state correctly applies the payment to 2018. And for any number of reasons, including some that are hypothetical and cannot be discussed here, you find out, in February of 2018, that you can and do want to deduct those state income taxes in 2018. Does the fact that you paid in 2017 REQUIRE that any deduction be taken only in tax year 2017. Or can you decide in Feb 2018 that, gee, I paid income tax to my state for tax year 2018, and it makes sense to take that deduction in 2018. (Assuming tax laws do not change).
In other words, can you have your cake (pay 2018 tax in 2017), then eat it too by kicking the decision about which year to take the tax deduction to (after) 1/1/18?
I know it’s hypothetical and we’re not allowed to discuss the new tax law, but it will be moot in 2018 if only property tax is allowed.
In keeping with good Boglehead practice, let's assume nothing changes and we plan to use current law.
No, it is only forum rules. It is foolish to not plan ahead for the future with ALL information available.

User avatar
Leesbro63
Posts: 4914
Joined: Mon Nov 08, 2010 4:36 pm

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

Post by Leesbro63 » Sat Dec 09, 2017 1:47 pm

OK, so again I ask: because of the current uncertainty, can one act now (prepay state income tax) and decide later (which year to take the deduction, if, indeed, there remains an option)?

jebmke
Posts: 7023
Joined: Thu Apr 05, 2007 2:44 pm

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

Post by jebmke » Sat Dec 09, 2017 1:56 pm

Leesbro63 wrote:
Sat Dec 09, 2017 1:47 pm
OK, so again I ask: because of the current uncertainty, can one act now (prepay state income tax) and decide later (which year to take the deduction, if, indeed, there remains an option)?
Probably not. If you are a cash basis taxpayer, deductions (which I distinguish from adjustments like IRA and HSA contributions) are generally deductible only in the year you paid for them.

From Pub 17
The following two tests must be met for you to deduct any tax.
The tax must be imposed on you.
You must pay the tax during your tax year.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Thesaints
Posts: 1068
Joined: Tue Jun 20, 2017 12:25 am

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

Post by Thesaints » Sat Dec 09, 2017 2:00 pm

Leesbro63 wrote:
Sat Dec 09, 2017 1:47 pm
OK, so again I ask: because of the current uncertainty, can one act now (prepay state income tax) and decide later (which year to take the deduction, if, indeed, there remains an option)?
No, you can only deduct for the tax year in which you paid.

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

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

Post by Chip » Sat Dec 09, 2017 2:11 pm

Leesbro63 wrote:
Sat Dec 09, 2017 1:47 pm
OK, so again I ask: because of the current uncertainty, can one act now (prepay state income tax) and decide later (which year to take the deduction, if, indeed, there remains an option)?
Unequivocally, NO. You are a cash basis taxpayer. Year paid = year of deduction.

User avatar
abuss368
Posts: 11886
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

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

Post by abuss368 » Sat Dec 09, 2017 2:13 pm

One may want to consider the prepayment (if not subject to AMT) with the possible pending changes for next year.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

Locked