The tax bill makes paying your final 2017 estimated taxes before year end a worthwhile move. For business owners, contractors, and others who may have dividends, stock gains, real estate gains and anything for which taxes haven’t been withheld, consider getting payments in before 2018 begins.
As everyone is probably sleeping off some major holiday feasting, I’ll keep this short and sweet.
One of the provisions in the newly passed tax bill is that beginning in 2018, you will be limited to deducting a maximum of $10k in state and local tax deductions which include income tax and property tax. Many of us have forms of income that do not have their taxes regularly withheld and either pay estimated taxes quarterly or just pay them at tax time in April of the following year. This affects everyone from small business owners and independent contractors to regular wage workers who happen to have stock gains, dividends, or other investment income that they’ll have to pay state income tax on for the year.
Given the tax bill cap on state and local deductions, it may save you hundreds or thousands of dollars to make sure you are paid up on your 2017 state income taxes before the clock runs down on the year.
Who Benefits From This Tax Bill Strategy?
You are most likely to benefit from this strategy if you meet the following criteria:
- You plan to itemize your taxes in 2017
- You will either take the standard deduction in 2018 OR you will itemize in 2018 with more $10k in state and local income and property taxes
- You are not subject to AMT in 2017
You must itemize your taxes in 2017 to see a benefit, because the deduction for paying state income taxes is an itemized deduction. Further, payments of state and local taxes are deductible in the year they are made, regardless of which year they are intended for. So if you want to pay for 2017 state income taxes but you make the payment in 2018, the payment is applied to your federal deductions for 2018 – the year the payment was made. Since there is a cap of $10k on state and local tax deductions next year, making sure your payments for 2017 state taxes actually take place in 2017 will allow you to deduct them on your federal returns in a year there is no cap.
The is excellent if you plan to exceed the $10k max next year or if because of the raised standard deductions ($12k individual/$24k married in 2018 vs $6.35k individual/$12.7k in 2017) you will be taking the standard deduction next year instead and not be able to deduct any state income tax payments.
The final criteria mentions AMT because the AMT calculation changes which deductions actually hold weight in computing your taxes. For AMT, you have to add back major deductions like state income taxes and property taxes. If you’re going to be hit by AMT, the hard work you do to get in these last-minute state income tax deductions will be basically moot because they get added back in the AMT calculation.
How To Implement The Tax Bill Strategy
Most states I believe have an online payment portal for paying taxes, and I recommend you use it over mailing in a check just to ensure the transaction settles this year. The entire process took me five minutes and will likely save us over $3,000.
Hopefully a few minutes of work will save you several hundreds to several thousand dollars in taxes as well!
Are you eligible for this strategy? What other things are you doing to optimize for the new tax bill?
Note: I am not a tax expert and would encourage you to consult a tax professional to verify the effectiveness of this strategy. Also note that this article discusses the payment of estimated 2017 taxes in the year 2017 as opposed to prepaying 2018 state income taxes in 2017. For those interested in the subject of prepaying 2018 income taxes, see the comments thread below.