So! Taxes!
A lot has happened in just the past few weeks. There isn't a lot of time to do much planning before year-end (and remember, none of the changes will impact the income you have earned this year), but there are two main questions that might be top of mind for you right now: what do I do about withholding for next year, and (this one is especially relevant for my NY clients) should I try to prepay my 2018 taxes if I'm losing the deduction? The first question will be answered in a later post once the IRS issues guidance and HR/payroll departments have had a chance to catch up; your take-home probably won't look that different in the meantime.
Without going too deep into the guts of the new law, here's a rundown on how the changes to the property and income tax deduction might affect you.
Currently (as in, how your 2017 taxes will be filed next year), if you itemize you can deduct the state and local taxes or state sales taxes you paid on line 5 or 6 of the Schedule A. Starting next year, these deductions are limited to a combined total of $10,000. So that leaves many taxpayers in a situation in which they have significant deductions for 2017 that they will lose for 2018; as a result, it makes sense to try to maximize those deductions now to ease the pain of losing them later.
The new law disallows deducting prepaid state and local income taxes; it does not, however, mention anything about deducting prepaid property taxes. This is a key point: the agency hasn't specifically said it will allow this deduction, either. So it is possible it could still be disallowed, though it's generally expected to be accepted.
Here are the questions you can ask yourself to determine if this move might make sense:
1) Did I itemize in 2017?
The standard deduction in 2017 for a married filing jointly couple is $12,600. If you're not sure whether you itemized or claimed the standard deduction, look at line 40 of your 2016 tax return. If you live in a high sales tax area or have a mortgage, you probably itemized because your deductions would have been more than that minimum amount. Unless 2017 saw some big changes for you in terms of income or where you lived (or medical expenses), assume this question will have the same answer in 2017. If you didn't itemize in 2016, you probably won't in 2017 and it's not worth prepaying. If you plan to itemize, continue to #2.
2) Will I itemize in 2018?
This is a big change in the incoming tax law: the standard deduction will see a large increase to $24,000 for a married filing jointly couple (this is paired with the elimination of the personal exemption, which for 2017 is $4,050 per person). So unless you have more deductions than this - and remember, you will only be allowed to deduct a maximum of $10,000 in combined state and local taxes - you will probably just take the standard deduction. Again, use your 2016 taxes as a guide and adjust accordingly for big changes. If you won't itemize, it doesn't matter when you pay your taxes. If you think you will itemize, continue to #3.
3) Am I subject to AMT?
The Alternative Minimum Tax as we know it dates from the early 80s and was implemented to serve as a parallel tax system to ensure high earning individuals (and corporations and trusts) did not escape taxes by using excess deductions and exclusions. It provides a minimum floor of tax that must be paid. In fact, AMT is calculated for every return; the taxpayer is required to pay the higher of AMT or regular tax. Over time the calculation has gotten out of sync with inflation, however, resulting in lower earners being affected. The law does address this somewhat (though crucially, it temporarily adjusts individual AMT while permanently repealing corporate AMT).
Here again, look at your 2016 return, specifically at line 45 on page 2 of the 1040: this will tell you if you owed and paid AMT. Remember, 2017 should be about the same as 2016, unless your particular situation changed. State and local taxes are one of the things that get added back (in other words, they're no longer deducted) for AMT purposes so if you're in AMT range, the extra deduction won't help you. If not, then it may make sense to prepay.
4) But how do I do it?
Municipalities are dealing with an onslaught of people trying to do just that, and they'll have the answer for you. With two business days left to apply a payment, there probably isn't enough time to make an extra payment through the mortgage company if you escrow your payment. Instead, bring a recent tax bill to the county tax office (and be prepared to wait in line!)
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