Prepayment of SALT Taxes? [State and Local]

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

Post by pshonore » Mon Dec 11, 2017 11:56 am

Allocationist wrote:
Mon Dec 11, 2017 9:44 am

It is not clear to me how the States will report 2018 tax payments in 2017. Nor do I understand how the IRS document matching program will compare the State reporting document with the (modified) TurboTax return. Any insights would be appreciated.

This thread has been very useful to me. I appreciate everyone's contributions. Thank you.
What State reporting document are you referring to? I don't think states report anything except refunds. One the other hand, the IRS and states have been sharing data for a long time for cross-checking purposes. Turbo Tax AFAIK only reports one gross number on Sched A for Income Tax paid. Now if you get audited, all bets are off because the IRS may require you to get down to the smallest detail but that's a different story

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

Post by Allocationist » Mon Dec 11, 2017 1:33 pm

pshonore wrote:
Mon Dec 11, 2017 11:56 am
Allocationist wrote:
Mon Dec 11, 2017 9:44 am

It is not clear to me how the States will report 2018 tax payments in 2017. Nor do I understand how the IRS document matching program will compare the State reporting document with the (modified) TurboTax return. Any insights would be appreciated.

This thread has been very useful to me. I appreciate everyone's contributions. Thank you.
What State reporting document are you referring to? I don't think states report anything except refunds. One the other hand, the IRS and states have been sharing data for a long time for cross-checking purposes. Turbo Tax AFAIK only reports one gross number on Sched A for Income Tax paid. Now if you get audited, all bets are off because the IRS may require you to get down to the smallest detail but that's a different story
Excellent question. I'm not sure what, if any, information sharing occurs between my State and the IRS concerning estimated taxes. Perhaps, as you suggest, there is no reporting. Thank you for raising the issue.

Leesbro63
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Re: Prepayment of SALT Taxes? [State and Local]

Post by Leesbro63 » Mon Dec 11, 2017 3:06 pm

This thread has been very valuable to me too. The power of Bogleheads. Thank you all for entertaining my questions etc and for the overall discussion of possibly how to maximize always changing world of taxation.

j0hnd0e
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Re: Prepayment of SALT Taxes? [State and Local]

Post by j0hnd0e » Mon Dec 11, 2017 3:27 pm

Has anyone tried or is interested in contacting IRS or a tax professional to get more information on whether this would be deductible in 2017 or not?

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

Post by jebmke » Mon Dec 11, 2017 3:30 pm

j0hnd0e wrote:
Mon Dec 11, 2017 3:27 pm
Has anyone tried or is interested in contacting IRS or a tax professional to get more information on whether this would be deductible in 2017 or not?
I recommended that upthread. I'd do it myself if I needed this deduction but I have others that are more valuable.
When you discover that you are riding a dead horse, the best strategy is to dismount.

MikeG62
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Re: Prepayment of SALT Taxes? [State and Local]

Post by MikeG62 » Mon Dec 11, 2017 4:21 pm

jebmke wrote:
Mon Dec 11, 2017 3:30 pm
j0hnd0e wrote:
Mon Dec 11, 2017 3:27 pm
Has anyone tried or is interested in contacting IRS or a tax professional to get more information on whether this would be deductible in 2017 or not?
I recommended that upthread. I'd do it myself if I needed this deduction but I have others that are more valuable.
Chip I think provided the guidance from the tax professional in his earlier post (see below).
Chip wrote:
Fri Dec 08, 2017 1:48 pm

...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.
In terms of Faber's credentials, there is this:

https://www.mwe.com/en/team/f/faber-peter-l

I'd say he is well qualified to provide advice which can be reasonably relied upon.

As far as calling the IRS, I don't think they will provide any definitive guidance (if Faber is not able to find anything given his expertise and resources). So whatever a rep on the phone is likely to say (if anything) won't be dispositive under IRS audit anyway.
Real Knowledge Comes Only From Experience

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

Post by jebmke » Mon Dec 11, 2017 4:26 pm

MikeG62 wrote:
Mon Dec 11, 2017 4:21 pm
So whatever a rep on the phone is likely to say (if anything) won't be dispositive under IRS audit anyway.
Is it ever? On many topics you can call multiple times and get different answers.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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

Post by stm » Mon Dec 11, 2017 4:29 pm

I've read the entire thread but as I'm not an accountant, I wanted to see if anyone could clarify. There are numerous posts about pre-paying 2018 taxes and being accountable for taxes on any 2018 refunds. But this is assuming overpaying, correct? If I were to prepay 2018 and then try and reduce withholding next year with my company, then I could still take the deduction in 2017 and not have an overpayment and worry about taxes for 2018?

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

Post by Thesaints » Mon Dec 11, 2017 4:36 pm

stm wrote:
Mon Dec 11, 2017 4:29 pm
I've read the entire thread but as I'm not an accountant, I wanted to see if anyone could clarify. There are numerous posts about pre-paying 2018 taxes and being accountable for taxes on any 2018 refunds. But this is assuming overpaying, correct? If I were to prepay 2018 and then try and reduce withholding next year with my company, then I could still take the deduction in 2017 and not have an overpayment and worry about taxes for 2018?
That’s my plan. Self employed can reduce their Estimated payments.

MikeG62
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Location: New Jersey

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

Post by MikeG62 » Mon Dec 11, 2017 4:47 pm

jebmke wrote:
Mon Dec 11, 2017 4:26 pm
MikeG62 wrote:
Mon Dec 11, 2017 4:21 pm
So whatever a rep on the phone is likely to say (if anything) won't be dispositive under IRS audit anyway.
Is it ever? On many topics you can call multiple times and get different answers.
Agreed, I would not waste any time calling the IRS on this and expecting to get any useful information.

The article from Faber coupled with the fact that my state (NJ) has the 2018 estimated tax vouchers available on their web site today is enough for me to give this a shot.
Real Knowledge Comes Only From Experience

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

Post by Thesaints » Mon Dec 11, 2017 4:51 pm

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.
But I cannot see how it could be not.

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

Post by Chip » Mon Dec 11, 2017 4:52 pm

Thesaints wrote:
Mon Dec 11, 2017 4:51 pm
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.
Where on earth did you get that idea?

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

Post by Thesaints » Mon Dec 11, 2017 4:58 pm

Chip wrote:
Mon Dec 11, 2017 4:52 pm
Thesaints wrote:
Mon Dec 11, 2017 4:51 pm
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.
Where on earth did you get that idea?
It is a well known rule. In case IRS does not respond and until a reply comes, one can go ahead with his plan and fines cannot be imposed. Of course, interests on late payments can, if that is the case. Any error is considered bona fide.

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

Post by Chip » Mon Dec 11, 2017 5:06 pm

Thesaints wrote:
Mon Dec 11, 2017 4:58 pm
It is a well known rule. In case IRS does not respond and until a reply comes, one can go ahead with his plan and fines cannot be imposed. Of course, interests on late payments can, if that is the case. Any error is considered bona fide.
Certainly not well known by me. Code citation please?

So you're suggesting that I could write the IRS and say, for instance, that I think that can deduct the entire cost of my 50k car (personal use only). Then if they don't respond in 30 days I'm off the hook for any penalties?

I don't think so.

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

Post by jebmke » Mon Dec 11, 2017 5:08 pm

Chip wrote:
Mon Dec 11, 2017 5:06 pm
Thesaints wrote:
Mon Dec 11, 2017 4:58 pm
It is a well known rule. In case IRS does not respond and until a reply comes, one can go ahead with his plan and fines cannot be imposed. Of course, interests on late payments can, if that is the case. Any error is considered bona fide.
Certainly not well known by me. Code citation please?

So you're suggesting that I could write the IRS and say, for instance, that I think that can deduct the entire cost of my 50k car (personal use only). Then if they don't respond in 30 days I'm off the hook for any penalties?

I don't think so.
Dear IRS:
I'm not paying taxes ever again. If I don't hear from you by January 11, 2018 I am assuming you're cool with that.
Best,
jebmke
When you discover that you are riding a dead horse, the best strategy is to dismount.

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

Post by Thesaints » Mon Dec 11, 2017 5:14 pm

You guys really crack me up. Research “private letter ruling”. Maybe “frivolous return penalties” too.

solar99999
Posts: 45
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Re: Prepayment of SALT Taxes? [State and Local]

Post by solar99999 » Mon Dec 11, 2017 5:37 pm

Chip wrote:
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.
The facts of Rev. Rul. 71-190 state that a cash basis corporation made a $6,000 payment on December 31, 1969 in estimation of its Kentucky State income tax liability for 1969. Although the final state income tax return filed on April 1970 resulted in an overpayment of tax of $3,000, the taxpayer was allowed to deduct the full $6,000 payment on its 1969 Federal tax return.

Although the facts above do not exactly mirror the original question - can one prepay his/her 2018 estimated state income taxes in the 2017 year - the Revenue Ruling cites that "In Lillian Bacon Glassell et al. v. Commissioner, 12 T.C. 232, acquiescence, C.B. 1949-2, 2, and Estate of Aaron Lowenstein, First National Bank of Mobile, Executor, v. Commissioner 12, T.C. 694, acquiescence, C.B. 1949-2, 2, the Tax Court held that advance payments of State income taxes in Louisiana and Alabama, respectively, made pursuant to specific provisions of State law authorizing such payments, constituted deductible items in the Federal income tax return filed for the years in which such payments were made."

As a New York CPA practicing tax for over 10 years, I would say

1) If your state requires that you remit estimated income tax payments,
2) You are able to and can document your attempt to make a good estimate of your tax liability (hardest to prove),
3) Your state authorizes making estimated tax payments early (usually when their website allows for it or when estimated tax vouchers are released), and
4) You remit your 2018 estimated tax payments in 2017,

You should be able to deduct them on your 2017 federal tax return.

This type of tax planning is rare for income taxes but common for real estate taxes because for the latter, the requirement to have a good estimate of your tax liability is already met by your state or local tax authorities (aka, your real estate tax bill). As a recommendation, I would not prepay any more than your full year 2018 estimated taxes using the safe harbor method if your state allows.
- Buffetthead | | "[Cash is] thought of as “safe.” In truth they are among the most dangerous of assets." | | http://fortune.com/2012/02/09/warren-buffett-why-stocks-beat-gold-and-bonds/

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

Post by mikep » Mon Dec 11, 2017 5:47 pm

solar99999 wrote:
Mon Dec 11, 2017 5:37 pm
Chip wrote:
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.
The facts of Rev. Rul. 71-190 state that a cash basis corporation made a $6,000 payment on December 31, 1969 in estimation of its Kentucky State income tax liability for 1969. Although the final state income tax return filed on April 1970 resulted in an overpayment of tax of $3,000, the taxpayer was allowed to deduct the full $6,000 payment on its 1969 Federal tax return.

Although the facts above do not exactly mirror the original question - can one prepay his/her 2018 estimated state income taxes in the 2017 year - the Revenue Ruling cites that "In Lillian Bacon Glassell et al. v. Commissioner, 12 T.C. 232, acquiescence, C.B. 1949-2, 2, and Estate of Aaron Lowenstein, First National Bank of Mobile, Executor, v. Commissioner 12, T.C. 694, acquiescence, C.B. 1949-2, 2, the Tax Court held that advance payments of State income taxes in Louisiana and Alabama, respectively, made pursuant to specific provisions of State law authorizing such payments, constituted deductible items in the Federal income tax return filed for the years in which such payments were made."

As a New York CPA practicing tax for over 10 years, I would say

1) If your state requires that you remit estimated income tax payments,
2) You are able to and can document your attempt to make a good estimate of your tax liability (hardest to prove),
3) Your state authorizes making estimated tax payments early (usually when their website allows for it or when estimated tax vouchers are released), and
4) You remit your 2018 estimated tax payments in 2017,

You should be able to deduct them on your 2017 federal tax return.

This type of tax planning is rare for income taxes but common for real estate taxes because for the latter, the requirement to have a good estimate of your tax liability is already met by your state or local tax authorities (aka, your real estate tax bill). As a recommendation, I would not prepay any more than your full year 2018 estimated taxes using the safe harbor method if your state allows.
Thanks.. I am good except for #1. I am not required to send in estimated tax payments as I am a W-2 employee, do you think this would work for me if I send in estimated tax payments and then claim 99 exemptions for the state on my W-4 form for 2018 since I paid it in 2017?

solar99999
Posts: 45
Joined: Fri Mar 03, 2017 7:32 am

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

Post by solar99999 » Mon Dec 11, 2017 6:25 pm

mikep wrote:
Mon Dec 11, 2017 5:47 pm
solar99999 wrote:
Mon Dec 11, 2017 5:37 pm
Chip wrote:
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.
The facts of Rev. Rul. 71-190 state that a cash basis corporation made a $6,000 payment on December 31, 1969 in estimation of its Kentucky State income tax liability for 1969. Although the final state income tax return filed on April 1970 resulted in an overpayment of tax of $3,000, the taxpayer was allowed to deduct the full $6,000 payment on its 1969 Federal tax return.

Although the facts above do not exactly mirror the original question - can one prepay his/her 2018 estimated state income taxes in the 2017 year - the Revenue Ruling cites that "In Lillian Bacon Glassell et al. v. Commissioner, 12 T.C. 232, acquiescence, C.B. 1949-2, 2, and Estate of Aaron Lowenstein, First National Bank of Mobile, Executor, v. Commissioner 12, T.C. 694, acquiescence, C.B. 1949-2, 2, the Tax Court held that advance payments of State income taxes in Louisiana and Alabama, respectively, made pursuant to specific provisions of State law authorizing such payments, constituted deductible items in the Federal income tax return filed for the years in which such payments were made."

As a New York CPA practicing tax for over 10 years, I would say

1) If your state requires that you remit estimated income tax payments,
2) You are able to and can document your attempt to make a good estimate of your tax liability (hardest to prove),
3) Your state authorizes making estimated tax payments early (usually when their website allows for it or when estimated tax vouchers are released), and
4) You remit your 2018 estimated tax payments in 2017,

You should be able to deduct them on your 2017 federal tax return.

This type of tax planning is rare for income taxes but common for real estate taxes because for the latter, the requirement to have a good estimate of your tax liability is already met by your state or local tax authorities (aka, your real estate tax bill). As a recommendation, I would not prepay any more than your full year 2018 estimated taxes using the safe harbor method if your state allows.
Thanks.. I am good except for #1. I am not required to send in estimated tax payments as I am a W-2 employee, do you think this would work for me if I send in estimated tax payments and then claim 99 exemptions for the state on my W-4 form for 2018 since I paid it in 2017?
You may run into some roadblocks. I don't know which state you would be paying tax in but if in New York, if you claim over 14 allowances, your employer has to submit a copy of your IT-2104 Withholding Allowance Certificate to the tax department and they may ask you to verify your allowances. If you are unable to verify your allowances, then they may instruct your employer to withhold taxes for you as if you claimed zero allowances. If you already paid in 2018 during 2017, then you are going to end up significant overpaid on your state income taxes and you will jeopardize your attempt to make a good estimate of your tax liability (IRS may inquire as to why you paid double your 2018 state income tax liability over 2017 & 2018).

Alternatively, you can submit IT-2104-E claiming exemption from withholding but you have to meet the following requirements or else you may be subject to a $500 penalty for furnishing false information:

1) you must be under age 18, or over age 65, or a full‑time student under age 25; and
2) you did not have a New York income tax liability for 2016; and
3) you do not expect to have a New York income tax liability for 2017 (for this purpose, you have a tax liability if your return shows tax before the allowance of any credit for income tax withheld).

If you want to go down this road, whether you claim 14 allowances, or 99 allowances, it is your risk to take.
- Buffetthead | | "[Cash is] thought of as “safe.” In truth they are among the most dangerous of assets." | | http://fortune.com/2012/02/09/warren-buffett-why-stocks-beat-gold-and-bonds/

mikep
Posts: 3697
Joined: Wed Apr 22, 2009 9:27 pm

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

Post by mikep » Mon Dec 11, 2017 6:49 pm

solar99999 wrote:
Mon Dec 11, 2017 6:25 pm
mikep wrote:
Mon Dec 11, 2017 5:47 pm
solar99999 wrote:
Mon Dec 11, 2017 5:37 pm
Chip wrote:
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.
The facts of Rev. Rul. 71-190 state that a cash basis corporation made a $6,000 payment on December 31, 1969 in estimation of its Kentucky State income tax liability for 1969. Although the final state income tax return filed on April 1970 resulted in an overpayment of tax of $3,000, the taxpayer was allowed to deduct the full $6,000 payment on its 1969 Federal tax return.

Although the facts above do not exactly mirror the original question - can one prepay his/her 2018 estimated state income taxes in the 2017 year - the Revenue Ruling cites that "In Lillian Bacon Glassell et al. v. Commissioner, 12 T.C. 232, acquiescence, C.B. 1949-2, 2, and Estate of Aaron Lowenstein, First National Bank of Mobile, Executor, v. Commissioner 12, T.C. 694, acquiescence, C.B. 1949-2, 2, the Tax Court held that advance payments of State income taxes in Louisiana and Alabama, respectively, made pursuant to specific provisions of State law authorizing such payments, constituted deductible items in the Federal income tax return filed for the years in which such payments were made."

As a New York CPA practicing tax for over 10 years, I would say

1) If your state requires that you remit estimated income tax payments,
2) You are able to and can document your attempt to make a good estimate of your tax liability (hardest to prove),
3) Your state authorizes making estimated tax payments early (usually when their website allows for it or when estimated tax vouchers are released), and
4) You remit your 2018 estimated tax payments in 2017,

You should be able to deduct them on your 2017 federal tax return.

This type of tax planning is rare for income taxes but common for real estate taxes because for the latter, the requirement to have a good estimate of your tax liability is already met by your state or local tax authorities (aka, your real estate tax bill). As a recommendation, I would not prepay any more than your full year 2018 estimated taxes using the safe harbor method if your state allows.
Thanks.. I am good except for #1. I am not required to send in estimated tax payments as I am a W-2 employee, do you think this would work for me if I send in estimated tax payments and then claim 99 exemptions for the state on my W-4 form for 2018 since I paid it in 2017?
You may run into some roadblocks. I don't know which state you would be paying tax in but if in New York, if you claim over 14 allowances, your employer has to submit a copy of your IT-2104 Withholding Allowance Certificate to the tax department and they may ask you to verify your allowances. If you are unable to verify your allowances, then they may instruct your employer to withhold taxes for you as if you claimed zero allowances. If you already paid in 2018 during 2017, then you are going to end up significant overpaid on your state income taxes and you will jeopardize your attempt to make a good estimate of your tax liability (IRS may inquire as to why you paid double your 2018 state income tax liability over 2017 & 2018).

Alternatively, you can submit IT-2104-E claiming exemption from withholding but you have to meet the following requirements or else you may be subject to a $500 penalty for furnishing false information:

1) you must be under age 18, or over age 65, or a full‑time student under age 25; and
2) you did not have a New York income tax liability for 2016; and
3) you do not expect to have a New York income tax liability for 2017 (for this purpose, you have a tax liability if your return shows tax before the allowance of any credit for income tax withheld).

If you want to go down this road, whether you claim 14 allowances, or 99 allowances, it is your risk to take.
California. They have similar language on their DE-4 form, although not a specific number of allowances:
http://www.edd.ca.gov/pdf_pub_ctr/de4.pdf
The burden of proof rests with the employee to show
the correct California Income Tax Withholding.
Pursuant to Section 4340-1(e) of Title 22, California
Code of Regulations (CCR), the FTB or the EDD may,
by special direction in writing, require an employer
to submit a Form W-4 or DE 4 when such forms are
necessary for the administration of the withholding
tax programs.

PENALTY: You may be fined $500 if you file, with no
reasonable basis, a DE 4 that results in less tax being
withheld than is properly allowable. In addition, criminal
penalties apply for willfully supplying false or fraudulent
information or failing to supply information requiring an
increase in withholding. This is provided by Section 13101
of the California Unemployment Insurance Code and
Section 19176 of the California Revenue and Taxation
Code.
I would think if I already paid my 2018 CA liability.. and filed a high # exemptions as possible to reduce 2018 that CA wouldn't fine me $500..I would just show my 2018 estimated tax receipt that they were already paid. If the IRS asks I'd just be honest about the whole thing.. I'd say I did that in order to deduct it, in 2018 there were bills that the deduction was going away...?

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

Post by Thesaints » Mon Dec 11, 2017 6:58 pm

Don’t CA allowances translate in roughly 1k/allowance ? 99 looks like an unnecessarily high figure.

I don’t think the potential problem has anything to do with CA. They would be only too happy to get their money earlier.
Instead, if I understand our CPA friend correctly, the IRS could determine that the estimated payment was not made in good faith and therefore disallow its deduction in 2017.

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

Post by privateer79 » Tue Dec 12, 2017 3:28 am

I've been following this thread eagerly, thanks all...

One nagging doubt arises.... If this is a legitimate manuver, why hasn't it been used extensively already by "bunchers" to push even more deductions into the year they opt to itemize?

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

Post by Tanelorn » Tue Dec 12, 2017 4:49 am

privateer79 wrote:
Tue Dec 12, 2017 3:28 am
I've been following this thread eagerly, thanks all...

One nagging doubt arises.... If this is a legitimate manuver, why hasn't it been used extensively already by "bunchers" to push even more deductions into the year they opt to itemize?
It's not necessary normally since you can wait two years to make that payment instead of doing it now (in a deduction year). This time, two years from now is no longer a deduction year.

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

Post by Chip » Tue Dec 12, 2017 6:43 am

Thesaints wrote:
Mon Dec 11, 2017 5:14 pm
You guys really crack me up. Research “private letter ruling”. Maybe “frivolous return penalties” too.
Perhaps you can show us how anything about a PLR relates to this statement of yours: "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 Chip » Tue Dec 12, 2017 6:56 am

privateer79 wrote:
Tue Dec 12, 2017 3:28 am
One nagging doubt arises.... If this is a legitimate manuver, why hasn't it been used extensively already by "bunchers" to push even more deductions into the year they opt to itemize?
I have been using this technique for bunching purposes since the early 2000s. I haven't been audited about it, but that doesn't really mean anything.

I suspect that the difficulty around legally adjusting W-2 state tax withholdings makes it difficult to execute for those that are still working. Plus the fact that some states may not accept the advance payment. Then there's the additional requirement of a good faith estimate. And there is no published IRS guidance directly on this subject.

It's pure speculation on my part but perhaps all of those factors together may cause people who write articles about bunching to skip the topic.

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

Post by Chip » Tue Dec 12, 2017 7:01 am

solar99999 wrote:
Mon Dec 11, 2017 5:37 pm
Although the facts above do not exactly mirror the original question - can one prepay his/her 2018 estimated state income taxes in the 2017 year - the Revenue Ruling cites that "In Lillian Bacon Glassell et al. v. Commissioner, 12 T.C. 232, acquiescence, C.B. 1949-2, 2, and Estate of Aaron Lowenstein, First National Bank of Mobile, Executor, v. Commissioner 12, T.C. 694, acquiescence, C.B. 1949-2, 2, the Tax Court held that advance payments of State income taxes in Louisiana and Alabama, respectively, made pursuant to specific provisions of State law authorizing such payments, constituted deductible items in the Federal income tax return filed for the years in which such payments were made."

As a New York CPA practicing tax for over 10 years, I would say

1) If your state requires that you remit estimated income tax payments,
2) You are able to and can document your attempt to make a good estimate of your tax liability (hardest to prove),
3) Your state authorizes making estimated tax payments early (usually when their website allows for it or when estimated tax vouchers are released), and
4) You remit your 2018 estimated tax payments in 2017,

You should be able to deduct them on your 2017 federal tax return.

[...]As a recommendation, I would not prepay any more than your full year 2018 estimated taxes using the safe harbor method if your state allows.
Thank you very much for the references and your opinion. They are very helpful.

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

Post by Leesbro63 » Tue Dec 12, 2017 1:19 pm

MORE! OK, I just listened to tax guru Robert Keebler, CPA's year-end planning conference call.

http://www.keeblerandassociates.com/about

He says you probably CANNOT deduct 2018 state income taxes in 2017 based on Revenue Rule 82-208. He did hedge by saying that his audience should make their own decision. I got the impression that he did not want to be responsible for people doing this but kinda thought that, if people do it, there might not be a challenge. But that's my own guess. All he said is what I stated above in the second sentence.

I looked at 82-208 and it's over my head. But I figured I'd throw this out there for smarter minds than mine to chew on.

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

Post by pshonore » Tue Dec 12, 2017 2:48 pm

Connecticut has just muddied the waters for this strategy by implementing MANDATORY withholding for all private and public pensions effective 1/1/18. Failure to file a new CT W4 equivalent form with your pension payer will require them to withhold 6.99% for state tax (the maximum rate). AGI of less than 24K (MFJ), etc are exempt. Flat amounts are not allowed. CT has no personal exemptions and very few adjustments to Federal AGI. Paying a large estimate in 2017 for 2018 state tax might cause a large refund in 2019, since tax will be withheld as well. It appears difficult to get around having anything other than what will you normally owe withheld. I have not checked to see if this applies to regular wages or not but it would not surprise me if it does.

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

Post by Chip » Tue Dec 12, 2017 2:55 pm

Leesbro63 wrote:
Tue Dec 12, 2017 1:19 pm
I looked at 82-208 and it's over my head. But I figured I'd throw this out there for smarter minds than mine to chew on.
I'm not a CPA or an attorney, but my primary takeaway from 82-208 is that it clearly states that a good faith estimate of state income tax liability is ONE required element for a federal deduction to be allowed. It doesn't say anything about deducting a payment in Year X for a good faith estimate of liability in Year X+1.

I'm not surprised that some CPAs would come to a different conclusion than other CPAs or tax attorneys. This is clearly a gray area (oxymoron alert!) since there is no direct IRS guidance on the issue. I think anyone who is considering about this strategy should pay close attention to the four requirements that solar99999 listed above.

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

Post by Nate79 » Tue Dec 12, 2017 3:37 pm

I thought about doing this. The Oregon website does appear to allow payment of 2018 estimated taxes though the website isn't 100% clear. The issue I see is that with the tax law change the prepayment of these taxes are being discussed a lot across the forums and I can see if it wasn't an IRS audit target in the past it could be in 2018.

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

Post by Thesaints » Tue Dec 12, 2017 5:37 pm

The more fearful should also have well clear that the so called "backdoor Roth" is not necessarily legal. There is no IRS guidance on it either and many have express doubts in the case of quick, when not immediate, conversions following the investment.

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

Post by msf » Tue Dec 12, 2017 6:53 pm

The NYTimes had an article about a week ago, where it said that Marcum's ("Ask Marcum") " tax and business services leader ... was exploring a novel strategy for clients to prepay New York State tax for the first, second and third quarters of 2018. He said it appeared to be allowed under a mechanism in the state tax code."
https://www.nytimes.com/2017/12/07/your ... ealth.html

The NYState online estimate payment system has drop-down choices for 1Q2018, 2Q2018, 3Q2018 as well as for 2017 estimates.

This Fairmark thread may also be useful. It presents the full text of Rev. Rul. 82-208. One of the posters also speculated (quite reasonably, I believe) that paying enough to meet the safe harbor requirement (typically 100% of last year's tax) would satisfy the requirement that the prepayment was made in good faith.
http://fairmark.com/forum/read.php?4,60521

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

Post by Sportswhiz00 » Tue Dec 12, 2017 7:15 pm

For those in AMT land, who are presumably a good portion of the population on this site, wouldn’t prepaying not make sense?

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

Post by telebell » Wed Dec 13, 2017 2:55 pm

I don't see where on the NYS DTF website it's possible to pay 2018 estimated taxes (I have an account). Can someone point me in the right direction?

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

Post by msf » Wed Dec 13, 2017 5:05 pm

Start with login at: https://www.tax.ny.gov/online/default.htm

When you get to your account summary home page, there should be a menu in the left column labeled Services. One of the choices is "Payments, bills, and notices". Open the submenu and select "Make a payment". That takes you to the payment page.

It's a sparse page with taxpayer ID, taxpayer name, and a select box. Select "pay estimated tax" and hit "continue".

This takes you to the page where you submit your estimated tax. The first entry is another select box, labeled "Quarter". The choices are currently (as of Dec 2017) 3Q2017, 4Q2017, 1Q2018, 2Q2018, 3Q2018.

No guarantees about what NYS will do with this. Just stating what's on the webpage.

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

Post by White Coat Investor » Wed Dec 13, 2017 5:34 pm

Thesaints wrote:
Sat Dec 09, 2017 5:50 pm
If I don’t write it in, it’t won’t appear. That much is certain.
Let me rephrase my consideration about the cost of first-class stamps: The price for the 2017 edition of Turbo-tax may turn out to be thousands of dollars for some.
You can override any line of Turbotax you want. You might have to buy the desktop version to do it. But I do it every year.
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Re: Prepayment of SALT Taxes? [State and Local]

Post by White Coat Investor » Wed Dec 13, 2017 5:51 pm

I called the Utah Tax Commission today. They said I could prepay my state income taxes for not only 2018, but also 2019 and 2020 and told me exactly how to do it (basically on the Utah estimated tax form you write in whatever date you like but on the computer version the latest date you can put in is 12/31/2020)

At an estimated marginal federal tax rate of 37%, that's a guaranteed return of ~ 34% (Pease phaseouts) on my 2018 "investment", ~17% guaranteed return on my 2019 investment and a guaranteed ~11% return on my 2020 investment.

I think I could come up with the money to do that.

One thing that gave me pause is some rumors coming out of Congress suggesting the potential $10K SALT deduction could be EITHER property or income taxes. Since my property taxes are only $3700 and my income taxes are well over $10K, I want to be careful to still owe $10K in state taxes in 2018.

I think I'm going to try this. I usually call the "gray areas" in the tax code in my favor. Worst case scenario, I get audited and lose.

My only question is how much to prepay. I think I'm way above AMT land, and I'm a little hesitant to drag it out for a three year experiment. But I think I'll probably at least pay the majority of my 2018 bill this month.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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

Post by Thesaints » Wed Dec 13, 2017 5:57 pm

White Coat Investor wrote:
Wed Dec 13, 2017 5:51 pm
One thing that gave me pause is some rumors coming out of Congress suggesting the potential $10K SALT deduction could be EITHER property or income taxes. Since my property taxes are only $3700 and my income taxes are well over $10K, I want to be careful to still owe $10K in state taxes in 2018.
But that's only in alternative to a standard deduction of at least 12k.

I'm with you, though. One should prepay as much as possible.

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

Post by White Coat Investor » Wed Dec 13, 2017 6:19 pm

Thesaints wrote:
Wed Dec 13, 2017 5:57 pm
White Coat Investor wrote:
Wed Dec 13, 2017 5:51 pm
One thing that gave me pause is some rumors coming out of Congress suggesting the potential $10K SALT deduction could be EITHER property or income taxes. Since my property taxes are only $3700 and my income taxes are well over $10K, I want to be careful to still owe $10K in state taxes in 2018.
But that's only in alternative to a standard deduction of at least 12k.

I'm with you, though. One should prepay as much as possible.
Although I don't have a mortgage any more and my property taxes are < $4K and I won't be able to deduct state income taxes in the future and the standard deduction is doubling, I'll still itemize as long as I'm working (and hopefully even afterward) thanks to charitable contributions.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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

Post by Nate79 » Wed Dec 13, 2017 6:56 pm

I went ahead and paid today Q1 2018 worth of state taxes online in Oregon. Will adjust my withholdings after the new year. Crossing my fingers that it works properly.

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

Post by pshonore » Wed Dec 13, 2017 7:58 pm

White Coat Investor wrote:
Wed Dec 13, 2017 5:34 pm
Thesaints wrote:
Sat Dec 09, 2017 5:50 pm
If I don’t write it in, it’t won’t appear. That much is certain.
Let me rephrase my consideration about the cost of first-class stamps: The price for the 2017 edition of Turbo-tax may turn out to be thousands of dollars for some.
You can override any line of Turbotax you want. You might have to buy the desktop version to do it. But I do it every year.
Quite true, but that eliminates e-filing. The chances of your return getting miskeyed or scrutinized are much greater.

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

Post by j0hnd0e » Wed Dec 13, 2017 10:41 pm

How exactly would one reduce withholdings next year by enough to avoid overpayment?

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

Post by boglesmind » Wed Dec 13, 2017 10:55 pm

pshonore wrote:
Wed Dec 13, 2017 7:58 pm
White Coat Investor wrote:
Wed Dec 13, 2017 5:34 pm
Thesaints wrote:
Sat Dec 09, 2017 5:50 pm
If I don’t write it in, it’t won’t appear. That much is certain.
Let me rephrase my consideration about the cost of first-class stamps: The price for the 2017 edition of Turbo-tax may turn out to be thousands of dollars for some.
You can override any line of Turbotax you want. You might have to buy the desktop version to do it. But I do it every year.
Quite true, but that eliminates e-filing. The chances of your return getting miskeyed or scrutinized are much greater.
For 20+ years I've been filing paper returns (including last 10+ years using Turbotax). Not a single letter from IRS (due to transcription errors either on their part or on mine). Sure, it's just an anecdote and YMMV. But I think the audit risk (or extra scrutiny) depends on the contents of the return and not on the form of filing - efile vs. paper). Turbotax even shows an "audit risk" scale based on the entries in the return and how far they are off compared to "similar" returns nationally.

BTW, these days IRS apparently scans returns and not have an army of temporary staff keying in returns.

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

Post by White Coat Investor » Wed Dec 13, 2017 11:00 pm

j0hnd0e wrote:
Wed Dec 13, 2017 10:41 pm
How exactly would one reduce withholdings next year by enough to avoid overpayment?
Be self-employed
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Re: Prepayment of SALT Taxes? [State and Local]

Post by boglesmind » Wed Dec 13, 2017 11:03 pm

Thesaints wrote:
Tue Dec 12, 2017 5:37 pm
The more fearful should also have well clear that the so called "backdoor Roth" is not necessarily legal. There is no IRS guidance on it either and many have express doubts in the case of quick, when not immediate, conversions following the investment.
Not necessarily so. Please see More support for backdoor Roth? [Roth IRA Decision reversing Tax Court]

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

Post by boglesmind » Wed Dec 13, 2017 11:07 pm

White Coat Investor wrote:
Wed Dec 13, 2017 11:00 pm
j0hnd0e wrote:
Wed Dec 13, 2017 10:41 pm
How exactly would one reduce withholdings next year by enough to avoid overpayment?
Be self-employed
Or fill out a new W-4 form with your employer claiming more deductions. I know of friends who adjust their W-4 throughout the year based on vanguard distributions, expected bonus pay-outs, RSU vesting (the tax deducted at source on RSU vesting is usually too low), etc.

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

Post by CAsage » Thu Dec 14, 2017 12:53 am

j0hnd0e wrote:
Wed Dec 13, 2017 10:41 pm
How exactly would one reduce withholdings next year by enough to avoid overpayment?
Raise the number of exemptions on your W-4 (that form you file with HR to tinker with withholding...._) Keep adjusting til you get it right! There are instructions on how to calculate the right number, but I've found using plain old arithmetic to add the amount paid YTD plus the future pay periods is more accurate.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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

Post by j0hnd0e » Thu Dec 14, 2017 1:47 am

CAsage wrote:
Thu Dec 14, 2017 12:53 am
j0hnd0e wrote:
Wed Dec 13, 2017 10:41 pm
How exactly would one reduce withholdings next year by enough to avoid overpayment?
Raise the number of exemptions on your W-4 (that form you file with HR to tinker with withholding...._) Keep adjusting til you get it right! There are instructions on how to calculate the right number, but I've found using plain old arithmetic to add the amount paid YTD plus the future pay periods is more accurate.
In CA one exemption is equivalent to $1000 deduction when calculating the withholding amount. For example, if you make $120k and want to prepay all of your 2018 state tax, you'd need to enter 120 (probably slightly less in practice) exemptions on W-4. That seems likely to raise a lot of questions, both from your employer and the state tax board...

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

Post by Thesaints » 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.

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

Post by j0hnd0e » 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.

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