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Should you prepay your 2018 property tax in 2017?
I have been getting this question from my clients, friends and acquaintances very frequently over past few days. An the answer to it is sure you should. Well I should say "you must" if you can. It will save you at the highest marginal rate of tax you pay on your 2017 tax return.
So lets take an example. Sandra pays her 2018 property taxes of $10,000 in 2017. Her marginal tax rate (based on line 43 of 2016 form 1040) from tax brackets tables on her 2016 tax return was 33%. Assuming her income is in the same range in 2017 as it was in 2016 she will save $3,300 (10,000 x 33%=$3,300) in federal taxes.
But there is a catch to it. If Sandra was in AMT in 2016 (simply said if there was a number on line 45 of her 1040 in 2016) and her 2017 income is similar to 2016 chances are she will not save any federal tax dollars by prepaying her 2018 property taxes in 2017. In that scenario she should not lock in her funds by prepaying property taxes in advance.
Per IRS Advisory "IR-2017-210" issued on December 27, 2017 only those 2018 property taxes that were "Assessed" in 2017 will be deductible on 2017 tax return. Therefore make sure you find this out from your county clerk before prepaying your 2018 taxes.
A quick note on state income tax - prepayment of 2018 state income tax in 2017 will not be deductible on 2017 federal tax return. But if you believe you will have 2017 state tax payable with 2017 tax return when you file it, it will be wise to make that payment now and get federal tax deduction for the same in 2017. Again the same AMT rule applies here as well. An amount on line 45 will preclude you from getting any deduction.
Written by: Mariya Luqmani, CPA, CA, MST