Friday, December 15, 2017

2018 State Taxes Not Deductible in 2017

Tax reform will likely result in individuals not able to claim an itemized deduction for all of their state taxes.  It looks like the final bill will only allow up to $10,000 of a combination of real property taxes and state income taxes. Some practitioners and taxpayers have wondered if individuals can prepay their 2018 state income taxes by 12/31/17 and claim a deduction in 2017 before the new law kicks in on 1/1/18 (assuming enacted).

The answer, I believe, is no.  At 12/31/17, you have no 2018 state tax liability because 2018 hasn't started yet. In contrast, if your property taxes were assessed in 2017 but you can pay them over installments in 2017 and 2018, you can pay the 2018 installment in 2017 and claim the deduction because it is truly a 2017 liability. Also, your fourth quarter estimated payment for your 2017 state income taxes is usually due 1/15/18, but can be paid in 2017. That is still fine and people will want to consider doing so, but must consider the 2017 AMT effect which might result in no tax benefit.  That 4th quarter estimate needs to be reasonable. That is, you can't make a very large 4th quarter payment for 2017 knowing you'll get a refund of it in 2018 (see Revenue Ruling 82-208).

We have AMT in 2017 and for many individuals, they won't get a state tax deduction because they will owe alternative minimum tax where you don't get to deduct your state taxes.

For a great explanation of the tax technical reasons why individuals can't deduct 2018 state tax estimates in 2017, please see the following article by Kip Dellinger and Chris Hesse, CPAs:




source http://21stcenturytaxation.blogspot.com/2017/12/2018-state-taxes-not-deductible-in-2017.html

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