The new law will severely reduce your ability to take itemized deductions on your federal tax returns in 2018 and beyond. And even if you can still take itemized deductions, it will put a severe limit on the amount of state and local income and property taxes you can deduct.
What to do? Prepay your 2018 state and local taxes and other deductible expenses before the end of 2017 so you can deduct them on your 2017 return.
For example, if you normally make state estimated tax payments, pay the installment due on 1/15/2018 in December 2017. If you expect to pay a balance due when you file your state income tax return on 4/15/2018, make a 4th quarter estimated tax payment in December 2017 instead. Not sure how much to pay? If you overpay, you will get a refund when you file your tax return, but the refund will be taxable next year (when the rates are allegedly lower than this year).
If you are subject to the AMT, consult your tax advisor before trying this.
Cook County Residents:
The Cook County Treasurer’s office has published instructions for how to pay your first installment property taxes, normally due on 3/1/2018, in 2017. (Note: Illinois bills property taxes a year in arrears. That means 2017 property taxes are paid in 2018.)
The new law has a section (Sec 11042) saying that any state or local income tax paid in 2017 or earlier that is imposed for a tax year of 2018 or later will be treated as if it was paid in the year the tax was imposed, not the year it was paid.
So you can still pay the balance due on your 2017 income taxes or estimated income taxes in 2017 and take a deduction. But don’t prepay your 2018 income taxes.
I’ve already paid all my (very high) property taxes, and I even sold some stock that I was expecting to sell within the next year or so. CA doesn’t have provisions for long term capital gains, so even though this is stock I bought almost 20 years ago, the gains won’t be discounted or indexed for inflation. At least I’ll be able to deduct the state income tax off my income for federal purposes.
Now, you should actually go through the calcs and makes sure that you don’t come out ahead in the new scheme. It’s possible, since the rates are lower, but in my case they don’t do the trick.
Isn’t the limit $10,000? I don’t know that I would call that a “severe” limit. That’s a lot of income and property taxes. I agree with this change. Why should the federal government allow full deduction of state and local taxes that exceed that rather high amount? The tax codes are full of deductions that are limited to some amount, or that you can’t use unless the amount is over some hurdle. And you’re right to point out the doubling of the standard deduction, which will work out better for a lot of families.
Sure, I would prefer a flat tax with no deductions whatsoever, but I don’t see that ever happening… in my lifetime, at least.
There’s quite a few states with high taxes that it is pretty easy for a homeowner to exceed this amount. So it is pretty likely that quite a few middle-class families will see their taxes go up because of this change. Seeing as how the highest earners are far more likely to see a tax cut, it seems reasonable to object to taxes increasing on a family making, say, $100,000 a year, in order to cut taxes for families making $500,000 a year.
Many more families making $100k a year will pay less in taxes than more. Here is a NYT (not known for their pro-GOP or pro-Trump bias) showing most households will pay less in taxes, including those making around $100k.
As was so glibly said about the ACA, there are winners and losers. As someone hammered by the ACA, and having local, state and property taxes well under $10k, I don’t have a problem with this particular aspect of the tax reform. But I recognize why those who are negatively impacted are upset, a bit of empathy I didn’t hear from the pro-ACA crowd.
I guess it depends on what you mean by “quite a few” and “middle class”. Only something like 35% of taxpayers even itemize now, so with the standard deduction doubling, that number is going to drop dramatically. And even if you do itemize, you are still going to see your tax rates go down, so there is an offsetting effect for those SALTs that put you over the $10K limit.
I’d be very surprised if, in CA, a family of 4 with a gross income of $100K will see their taxes go up. It’s possible, but unlikely.
It’s much more likely that the family making $500K is going to see taxes go up than the one making $100K, since they pay high state taxes and almost certainly more property taxes. It’s the super-wealthy who are going to see their taxes go down “big league”, at the expense of those in the $200K - $500K (or maybe a bit higher) range.
The thing about CA property taxes is that they run from Jul - Jul. I don’t know if that unusual, but my tax bill is called the 2017/2018 tax bill. Half of it is due in Feb 2018 (with a grace period thru Apr before a penalty kicks in), but it’s still for the combined year. I believe IL is that way, too, so maybe it’s not so uncommon.
If I’m reading Bone’s cite correctly (and I could very well be reading that gobbledygook incorrectly), the definition is for tax years bringing after Dec 31, 2017. But CA’s property tax year states in July, so we should be good paying in full. No?
I think you are correct, though I’m not an accountant, I suspect you can still pay early if you have a mechanism to do so. But I would ask your tax preparer to make sure.
You’re looking at the version of the bill that passed the Senate. The compromise bill that the House and Senate are probably going to pass next week is here.
In Illinois, the property tax imposed for the 2017 calendar year is payable in two installments due in 2018.
This imposes a peculiar predicament for home buyers. They cannot claim a federal tax deduction for the real estate taxes they pay in the year they purchase the house, because they were not the owners of the house in the year the tax was imposed.
Thank you, that’s helpful. So here is what I’m reading:
There’s a few things I have quibbles with. The language in question that adjusts the dating only applies to Section B that describes the 10K limit. Also, it says it is with “respect to a State or local income taxes imposed”. Property taxes are neither state income taxes or local income taxes, so I’m not sure they are subject to this. Otherwise, the whole prepaying thing doesn’t seem like it’s going to fly.
Just didsome back of the envelope calcs for my family. I think I’ll lose about 35-40K of deductions. Thats the amount of SALT over 10K and the exemptions lost.
I’ll still be over the standard deduction, but much less so. That means the increase in standard deduction isn’t helpful, but the elimination of personal exemptions are pretty awful, given the number of folks in the household and dependents.
The actual text of the conference bill seems pretty clear: ‘income tax’, which is not property tax. A couple of days ago a NYT story said it prohibited prepaying both income and property taxes, so that’s been echoing around among people who take the NYT as gospel, but now when I look at that story they’ve corrected it. There doesn’t seem any basis to think the prohibition includes 2018 property tax.
I’m thinking it’s more of a stretch though to prepay and deduct in 17 prop taxes for 18 that haven’t even been billed. I have bills for Q1/2 2018 prop tax due in Feb and May 2018. I’m going to make sure my town will accept payment now, make sure the tax bill actually passes, then very likely pay 1/2 of 2018 prop tax this year and deduct it on 2017 return.