Since the final federal tax bill (“tax bill”) appeared for the first time last Friday, December 15, 2017, many people have had questions as to how to best take advantage of the new bill. One way to take advantage of the tax bill is to prepay on state and local income taxes and property taxes. As the name suggests, prepayment means paying taxes in one year instead of another. Although counterintuitive, making advance payments on your state and local income taxes and property taxes can potentially save you upwards of five (5) figures.
The following is a brief breakdown on how the tax bill will effect the prepayment of state and local income taxes; property taxes; and quarterly state income taxes.
Prepayment: State and Local Income Taxes
Starting next year in 2018, the tax bill prohibits you from deducting more than $10,000 of the combined total of your state and local income taxes and local property taxes from your personal, federal income tax return. For states that do not implement a state and local income tax, the $10,000 cap applies to sales taxes.
Further, the tax bill prevents you from making a prepayment on your 2018 state and local income taxes so as to beat the $10,000 cap. For example, if your state and local incomes taxes exceed $10,000, you cannot take a deduction on your federal income tax return if you prepay next year’s income taxes.
However, if you are deducting less than $10,000 of the combined total of your state and local income taxes (and local property taxes), prepayment is a viable option.
Prepayment: Property Taxes
As mentioned, the tax bill’s $10,000 cap will apply to property taxes, and will go into effect in 2018.
Unlike state and local income taxes, prepayment is an available option with regard to your property taxes regardless of the amount of the deduction. For example, if your property taxes exceed $10,000, you can take a deduction on your federal income tax return if you prepay next year’s property taxes.
If you can make a prepayment on your property taxes, it is advantageous to do so. However, depending on where you live, you may not be permitted to make prepayments on your property taxes. For instance, the Internal Revenue Service (“IRS”) offers caution before prepaying on property taxes in areas where property taxes (i.e., 2018 property taxes) have not been assessed. In such areas where property taxes have not been assessed, making a prepayment might not pay off.
Before making a prepayment on your 2018 property taxes, consult your local taxing authority in order to make sure prepayment is permitted.
Prepayment: Quarterly State Income Taxes
As you may be aware, January 16th, 2018, is the due date of the fourth and final quarterly state income tax payment. Although technically not a prepayment , you can decide to make the fourth and final payment on or before December 31st, 2017. By “prepaying” on your fourth and final payment, you can deduct the payment on your 2017 tax return.
As a caveat, it is important to understand that not everyone pays quarterly state income taxes. As a general rule, if you are not a salaried employee, then you likely make quarterly income tax payments. Accordingly, the above information is applicable as it relates to your financial interest.
With less than three (3) weeks left in the 2017 calendar year, it is financially advantageous to seek out advice in order to determine if you qualify to make prepayments on your state and local income taxes; property taxes; or quarterly state income taxes. This could be the difference in saving thousands of dollars.
For more information on how the tax bill may affect you, please feel free to contact the law firm of Martinson & Beason, P.C.
 Even if the fourth and final quarterly state income tax payment is made before January 16th, 2018, it is not considered a prepayment. Rather, the payment is for the fourth quarter of 2017.