Individuals should be sure to pay fourth quarter estimated state income and property taxes by year-end, but hold off on any prepayments of future state income taxes.
Congress has completed work toward its tax reform vision with the passage of historic legislation, and the President signed the legislation into law December 22. Certain provisions in the tax reform bill potentially impact year-end tax planning strategies, and it is important to focus on one such strategy involving prepayments of individual state income taxes. A popular idea surfaced recently that would encourage individual taxpayers to pay not only 2017 fourth quarter state income tax deposits in 2017, but also to prepay 2018 state income tax in 2017.
With the tax reform bill limiting itemized deductions for combined state income and property taxes to $10,000 in 2018, individual taxpayers are advantaged to pay as much state income taxes in 2017 as possible. However, the tax reform bill specifically prohibits an individual’s ability to claim a 2017 deduction for prepaid 2018 state income taxes.
The general rule provides that cash method taxpayers can deduct taxes when they are paid. Concerning estimated tax deposits, a cash method taxpayer can deduct such payments provided the payments are authorized under state law and accepted by the state agency. Many commenters note that the availability of state estimated tax payment forms for the appropriate year (or electronic payment mechanisms for the appropriate year) satisfy this condition. Although, certain jurisdictions recently made 2018 estimated tax payment forms available in December 2017, the new law eliminates the possibility of taking the deduction this year.
Individual taxpayers should still, on the other hand, make as many payments toward 2017 state income taxes as possible in 2017, taking into account their potential alternative minimum tax consequences. And, individual taxpayers should make payments toward state and local property taxes in 2017, to the extent the instrumentality has rendered an assessment and installment payments toward that assessment remain unpaid.
For more information concerning prepaid state taxes and other year-end tax planning ideas, please contact your local CBIZ MHM tax advisor.
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