Are you Prepaying Taxes and Deductions before the new Tax Law Goes into Effect on January 1st?

I decided to try something different and post some thoughts on taxes, revolving around upcoming changes to the tax code. Let us know if you find this kind of post useful. It goes without saying that all information below is for discussion purposes; consult your tax advisor before acting.

You can read up on the new tax law on the internet. Briefly, the laws which goes into effect on January 1, 2018 lowers tax rates across the board by a few percent. It also caps the state and local tax deduction to $10,000. There’s much discussion about what people should be doing before year-end to prepare. I’d recommend chatting with your accountant in the few remaining days if you haven’t already.

There are a few reasons to consider prepaying taxes and other payments/dues which are deductible. Note: this conversation only applies to those who plan to itemize their taxes in 2017, not for the majority of Americans who take the standard deduction.

  1. Since your tax bracket will be a few percent lower next year, you might as well maximize all deductions now (within the next few days), thus minimizing 2017 income and increasing 2018 income. Some people are making their next month’s mortgage payment, for example. Others are pushing through any charity donations they were going to make, or even paying out their entire next year’s charity contribution now. Likewise, if you can somehow defer income by a few days, it can be advantageous to do so.
  2. Since next year there’ll be a cap on state and local taxes, people who will blow past that cap are trying to pay up or even prepay their state and local taxes now by December 31. Every dollar paid now can potentially save you even 25% or more, depending on your tax bracket.
    • On the state taxes front, the law is clear that you can NOT prepay 2018 state taxes and take the deduction. However, you can finish paying off any remaining dues for 2017 and get the unlimited deduction. If you wait until January or April to finish paying your 2017 state taxes, the payment will be subject to the $10k cap, despite the fact that it’s going toward 2017 dues. For that reason, those who plan on itemizing in 2018 and who will blow past the $10k limit can gain from paying off however much you think you’ll owe in state taxes before year’s end.
    • On the local front, like property taxes, the IRS has not been clear whether prepaying 2018 taxes now will be deductible. A lot of towns are modifying their system to allow prepaying for the entire 2018 with the hopes that it’ll be deductible. Town executives across America are rejoicing in the float that’s coming their way from all the  prepayments. It’s entirely possible all these 2018 prepayments will be for naught. [Update: apparently, the IRS finally came out with a guidance that only property taxes which were assessed in 2017 will count, not bonafide prepayments. “A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.” I assume that excludes most prepayments that people are doing, unless the towns quickly mobilize to officially assess the dues. It should – in a lot of cases – include local taxes paid for the beginning of 2018 since those bills have likely been sent out in December.]
  3. Some people won’t be itemizing in 2018 due to the higher standard deduction amount, but they are itemizing in 2017. For these people, there’s a major gain in maxing out their deductions now. As an example, someone in the 25% tax bracket who plans on giving $10k of charity will save $2,500 by giving now versus giving in the coming year or years. And someone in the 25% bracket who pays their January mortgage now can save hundreds of dollars, versus paying it in a few days/weeks when it’s due.

How do you make state and local tax payments? Mailing in a check is not the best idea since we have a January 1 deadline. Fortunately, most states and localities allow online payments.  I’d guess ACH/e-check payments made online will post based on the date it was processed (even though it might take a few days until the funds clear), but I can’t say that for certain – it’ll depend how the state/city decides to treat it. Credit card payments should go by the date processed since there’s no funding delay. You don’t want to use a third-party processor like Plastiq since time is of the essence here.

Many cities and states allow paying taxes with a credit card on their website (the city/state might redirect you to a provider who processes the payment for them). There’s usually a fee for doing so. Luckily, the fee is often in the 2% area or less (I saw a 1.77% fee in one instance), and most of us have a credit card which earns rewards higher than that, meaning that it’s slightly profitable to be using this option, regardless.

One final note, it’s worth comparing your tax bracket for 2017 and 2018 when evaluating whether to max out your deductions now since it might not always hold true that prepaying is better. For example, I noticed a donut hole where a single tax filer making between $$157,500 and $191,650 will actually be worse off prepaying. There are probably other such examples too (to be clear, their overall taxes will be lower, just prepaying isn’t necessarily a good idea). However, most income levels and statuses who itemize will gain by prepaying.

Let us know if you see any mistakes in this post – I’m no tax expert. Also, if we can please keep the comments non-political it’s greatly appreciated; the purpose of this post is only to discuss how we can save on taxes with planning.

Here’s the 2018 chart (courtesy of thebalance.com):

Here’s the 2017 chart (courtesy of studentloanhero.com):
    Chuck
  • On December 28, 2017, 11:00

View Comments (116)

  • I am married filing jointly and currently itemize with maybe about 20k in itemization. Therefore I'm in a good spot to maximize any prepayment possible in 2017 as it will be for naught next year.

    1) I did some significant front loaded charitable giving on a 0% interest credit card

    2) I prepaid county taxes per https://gobroomecounty.co.broome.ny.us/files/executive/News%20Release%202018%20Taxes%20%281%29.pdf
    I met some weird challenges, despite that publication. They wouldn't actually accept a face to face walk in payment and wouldn't process the payments and claim they won't until 1/2. Rather, they would only take a postmarked mailed envelope and that's supposed to be our proof. I couldn't understand why
    3) I attempted to go prepay my mortgage for 1/1/18 . However, I found that the site said any payment in advance of the 1st would not post until the listed due date, so more mortgage interest was a wash.

    Overall, I got a good value from 1, hope 2 works out, and 3 didn't work out but was the least valuable.

  • I will not be. Married, have a mortgage, student loans, charitable donations, etc., but after doing the math, I make out better with filing taxes under the new bill for the 2018 year. It's surprising to see this many people are prepaying their property taxes. I really hope they have sat down with a CPA or really went through the bill (it's available on the government's website, don't use a news sites version) and understood it and did the math both ways. I think CNN has a calculator to give you a REALLY rough estimate of your taxes will be under the new bill.
    Again, I would still sit down and do them out completely still.

    • Quite a few people are going to save on taxes next year (at least until 2025), me included.. despite the elimination of "personal exemption" and limit on SALT deduction. Even if you are better off under new system it still may benefit you paying what you can now.

      If you SALT + property tax is over $10K paying a portion of your property tax now will not take anything away from your 2018 deductions, but will increase 2017.

      I am in California, and in my case I am talking about the Installment #2 for 2017 fiscal year. It is due 02/01/2018, but it is already assessed. Seems like in that case it should be permitted even under recent IRS clarification.

      Good luck!

  • One additional point. You should not prepay if you end up hitting AMT. If you have a tax advisor / CPA, ask him/her to run some quick numbers to make sure prepaying doesn't put you into AMT.

    • For most people stuck with AMT their state income tax will bring them close or over the $10,000 limit regardless. So the only harm is losing the 1.5% or so APY in interest that money could have been making. Of course if you are liquidating investments to prepay property tax, don't do that.

  • Dear DOC,

    Thank you SO MUCH for doing a post on this. Saving on my taxes is better than any manufactured spend (but keep doing that, too!) The comments have been helpful as well.

    1) I fully paid my 2017 state income taxes
    2) I always pay my January mortgage payment on 12/31
    3) I did some 2018 charitable deductions early
    4) I'm going to roll the dice and pre-pay my 2018 property taxes.

    We live in Maryland and will itemize in 2017. Our 2018 state income taxes will be above the $10K deduction cap.

    If I prepay my 2018 property taxes ($4400) and AM able to deduct, using my 25% marginal tax rate, I save $1100.

    If I'm unable to deduct the 2018 prepayment, I lose out on the minimal interest earned on $4400 (and that interest is taxed anyway).

    Anyone else in Maryland who has spoken with a tax advisor? The county tax office only says they can't really comment, but they will take prepayment, and to call a tax advisor.

    • Ugh, Maryland, my uncle lives there, I do his taxes, it's a nightmare of a state half the time (I mean, a rain tax ... come on... haha).
      Anyway! I have roughly seen that most Maryland counties will take the prepayment, there are a few that won't it seems.

      Also, you wouldn't lose out on that 1,100 really. You have to figure out what your new Marginal and Effective tax rates will be with the new standard deductions. Obviously, I don't know your situation (marriage status, deductions, salary, effective tax rate, etc.), but most likely you would lose a lot less than 1,100. You could end up gaining a bit more, but it depends where you fall in the marginal tax brackets and other things.

  • There’s no such thing as a “25% tax bracket” since I could be in that bracket but only $1 is subject to 25%.

    I know what you’re getting at but most people have no idea how tax brackets actually work.

    • Everyone but you understands that tax bracket refers to marginal tax rate but your pedantry is appreciated.

      • But there is a difference between marginal and effective tax rates, important to understand the difference (which is what I assume the person who started this thread was talking about).

    • The tax bracket you're in is the rate at which any changes you make in income or deductions would be taxed at. In your example, if only $1 is subject to 25%, you are in the 15% bracket if you're considering reducing income or increasing deductions.

  • I never see it mentioned anywhere - but it sure looks like there's a random increase in one bracket of people making 200-500k; I'm not saying they're gonna be hurting for it. Just wondering if I'm missing something since no one ever mentions it. Looks like that range jumps from 33 to 35 under the new plan -- is there some math I'm missing? I don't imagine there are a lot of folks in that particular spot; just wondering.

    • you're actually not calculating this correctly... the tax bill was designed to decrease everybody's tax liability (outside of restructuring deductions). So even though the marginal rate is higher for incomes in that range, the rates on taxes up until that bracket are significantly lower and overwhelm the higher marginal rate, making for an overall lower gross tax rate. So in short, you arent properly accounting for the lower rates on income up to 200,000

      • If you were just referring to the marginal rate and whether prepaying taxes would be a benefit to those people, then you have a point. But it's likely that someone in that tax range pays more than 10k in SALT (and therefore would be better off taking the tax deduction now even at a lower marginal rate)

    • I noted a different increase in the post as well.

      I am quite surprised no one mentions it since I imagine there are many single professionals making in the upper $100k range, and they'll lose by increasing their deductions now (unless they plan on using standard deduction in 2018).

  • For those that itemize and reside in states with low or no local income taxes you may consider pulling any large planned purchases subject to local sales tax into 2017.

    It might even be possible to make a very large purchase in the 2017 tax year, deduct the taxes paid and subsequently return the item, paying a lower rate on the income derived from the refunded tax in 2018.

    • That's a potentially hilarious idea. Charge a couple of $30K boats on December 30 then "return" them on January 2.

  • Great post. AZ is a "low" state-tax state, but be wary. As a DP for Arizona, we're going to be over the $10K limit, given our LLC and salaries from employers. So even if you don't think the state tax limit write-off won't affect you, go back and make *sure* you won't take a hit.

    Also, we prepaid our property taxes wherever possible for 2018.

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