Tax reform legislation is on track for passage before the end of this year, significantly transforming the U.S. tax code. One of the key aspects of the current legislation is capping the state and local income tax, sales tax in lieu of income tax and real estate tax deduction at $10,000 for 2018.
For individual taxpayers that make quarterly estimated payments of these taxes throughout the year, we highlight an opportunity to potentially lock in tax benefits in 2017 before 2018 changes take effect.
Due date for 2017 fourth quarter installment
The 2017 fourth quarter state and local estimated income taxes are not due until January 15, 2018. For taxpayers with more than $10,000 in combined state and local income and real estate taxes, paying the estimate in January means they would be ineligible for a combined deduction of amounts over $10,000.
In addition, any 2017 state and local tax liabilities paid with the 2017 tax returns in April could also be lost.
Benefits to paying now
Paying this installment before December ends will allow taxpayers to potentially deduct the full amount of taxes paid during the 2017 tax year. The anticipated 2017 state and local tax liabilities due in April can also be built into the fourth quarter estimate and paid before December ends.
This two-week difference in payment timing could keep a sizeable payment deductible, or change it into a fully non-deductible category, provided a taxpayer already exceeded the $10,000 threshold. Be sure to discuss any potential alternative minimum tax impact and any overall limitations on your itemized deductions with your tax advisor, as accelerating this deduction may not be beneficial to all.
Caution about prepaying 2018 state and local taxes
This guidance specifically focuses on the payment of 2017 fourth quarter tax estimates. The legislative language, as it stands at time of publication, disallows a deduction for the prepayment of state and local taxes due in tax years 2018 and beyond.
Ready to execute this strategy? RKL can help.
Contributed by Kevin A. Eisenhart, CPA, MBA, MST, Partner in RKL’s Tax Services Group. Kevin takes a strategic approach to tax planning and compliance to help his clients build value. He specializes in the taxation of corporations, S corporations and partnerships, including issues surrounding multistate taxation and consolidated return matters.
Don’t miss the latest RKL business analysis and insights. Sign up for our e-newsletter.