A tax question

[Gumby]

Assuming that beginning 1/1/18, state income taxes are no longer deductible on my federal taxes, I have been contemplating tax actions for the rest of the year. Among other things, I am thinking about making an estimated tax payment to my state for income taxes that will be due in 2018.

Assume for the sake of this question that my state taxes will be $8000 for 2018, that my paycheck withholding in 2018 will be about $$8000 and that I am in the 25% federal tax bracket. If I prepay $8000 before year end, can I deduct it on my 2017 federal tax return, thereby saving $2000 in federal tax? My ideal situation would be to make that payment and then rig my state W-4 so that I have no withholding in 2018 (I'm still employed full time). By the end of the year, I would be even steven. However, I'm not sure I could do that without making some misstatement on my state W-4. So, I would be willing to go ahead and make the prepayment of 2018 estimated taxes in 2017, suffer the withholding all year in 2018, and then recover the $8000 or so when I file in 2019.

Will this plan work?

 

[Another Reader]

Preliminary analysis of the reconciled bill looks like you can deduct a total of $10,000 in property and SALT. I would wait a few days before doing anything.

Bloomberg article: https://www.bloomberg.com/news/arti...r-top-end-21-corporate-rate-tax-debate-update

 

[kaneohe]

Won't you get a 8K state refund which will be taxable the next yr?

 

[GrayHare]

Won't you get a 8K state refund which will be taxable the next yr?

That's what I was thinking too.

 

[Gumby]

Won't you get a 8K state refund which will be taxable the next yr?

Not if I don't deduct state taxes on my 2018 return and instead use the larger standard deduction. At least, that's how I see it.

 

[kaneohe]

Not if I don't deduct state taxes on my 2018 return and instead use the larger standard deduction. At least, that's how I see it.

I understood that you were going to make the prepayment in 2017 so you would presumably benefit from that larger deduction allowable in 2017. Under current law, the refund in 2018 would be taxable to the extent you benefited in 2017 from taking the itemized deduction. Depends how the new law is written but I would be surprised if the refund is non-taxable for 2018 even if
they don't allow SALT deductions in the future.......seems like they would write a transition law to catch this type of cleverness but maybe they aren't clever enough.

 

[RunningBum]

Have you checked your state to see if that is even possible? I checked the site for mine (VA), and I can only make estimated tax payments for tax year 2017. I don't see any option to credit them to 2018.


Also, in Turbo Tax it only asks for tax payments made during the year 2017 for tax year 2016 or 2017. I'm not sure how that translates to the forms to see if there would be a way to override it. I'll leave that for you or someone else to investigate.


You could grossly overpay your 2017 taxes by making a large estimated payment before the end of the year, and then just apply the refund to your 2018 taxes. However, the refund will show as taxable income for 2018. I think that would turn into a wash for you, wouldn't it, unless you're in a lower bracket next year? It would be worse for me, as it could knock me over the ACA subsidy cliff, so I'm trying to get 2017 state taxes paid up as closely as possible before the end of the year, to fully get the tax deduction this year with no refund income next year to raise my MAGI.

 

[Gumby]

I understood that you were going to make the prepayment in 2017 so you would presumably benefit from that larger deduction allowable in 2017. Under current law, the refund in 2018 would be taxable to the extent you benefited in 2017 from taking the itemized deduction. Depends how the new law is written but I would be surprised if the refund is non-taxable for 2018 even if
they don't allow SALT deductions in the future.......seems like they would write a transition law to catch this type of cleverness but maybe they aren't clever enough.

I'm not sure that in the haste to pass this bill this issue will be caught. And even if I incur additional taxable income in 2019, my marginal bracket will likely be the same or lower.

In the end, I'm not sure how much pain in the butt it is worth to maybe save $2000. But I thought it worth the effort to ask here.

 

[Gumby]

Have you checked your state to see if that is even possible? I checked the site for mine (VA), and I can only make estimated tax payments for tax year 2017. I don't see any option to credit them to 2018.

Yes, I can send them a 2018 estimated tax payment before 12/31/2017.

 

[Sunset]

Our State wants you tell them, and then they send you a bill for the estimated 1st payment of next year, which works out to 55% of current year taxes.

When we do the tax software, we just put down what we paid in the year (even if the State applies it to the next year payment bill).