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Should I Prepay My State Taxes?

It’s true, the new tax bill will limit the amount of state income, sales and property tax that can be deducted to $10,000. Our clients have been calling to ask if there is a work around. Here’s the answer: Yes and No. And for the “yes” you will need to have the cash flow right now. Here’s what we know.

For those who itemize on Schedule A (deduct more than the standard deduction) it could make sense to prepay what you can since these taxes are still fully deductible for the 2017 tax year. IF this is you AND you have the funds available to prepay your personal taxes, here is a breakdown of the options, according to both the bill itself and staff members from the relevant House and Senate committees.

State and Local Income Taxes (Can’t prepay)

Starting next year, you won’t be able to deduct more than $10,000 of the combined total of your state and local income taxes and your local property taxes on your personal federal income tax return (or sales plus property taxes in states where there is no income tax).

Unfortunately, the bad news here is that Republican tax bill writers prohibited taking a deduction this year if you prepay next year’s income taxes.

Property Taxes (Can prepay currently generated bills)

The good news is if you can save money on your taxes overall by paying your property taxes this year, when the $10,000 cap is not yet in effect, you should seriously consider it.

Check with your local taxing authority about whether they allow prepayment — and how much you can actually pay in advance. There are different rules in different jurisdictions.

For example, we called the Alameda County, California and Kings County, New York tax assessors’ offices. Both offices told us that you can pay current bills (in Alameda due February, 2018 and in Kings County due April, 2018), by the end of the year. But they cannot accept prepayment for bills that have not yet been generated.

Quarterly State Income Taxes (Can prepay your 4th Quarter 2017 estimated payments)

If you are not a salaried employee or if you have freelance income, you probably make quarterly estimated income tax payments to your state taxing authority. If so, your 2017 4th quarter payment is due Jan. 16, 2018.

Because that payment is for the fourth quarter of this year (even though you don’t have to pay it until 16 days into next year), it’s not technically a prepayment if you pay it this year.

The new tax bill does not keep you from making that fourth-quarter state income tax payment on Dec. 31 or before. If you do that and your overall tax situation allows it, you can deduct the payment on your 2017 tax return.

Keep your eyes peeled here as the Tax Nerds continue to parse through the bill.

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