Opportunity with Risk: Is it Possible to Save or Stall the Loss of the State Tax Deduction?
This blog was updated on December 15, 2017 at 4:05 PM
At 3:30 PM today the House released the Conference Report on the Tax Cuts and Jobs Act. The report includes a new provision that if it holds up and is voted into law, will eliminate the opportunity to prepay 2018 taxes and take the deduction in 2017. Please stay tuned as we continue to monitor the progress.
Caution should be taken to fully evaluate the status of the legislation before taking any action. The Senate and House bills are currently not synchronized and until such time as they are, this POTENTIAL opportunity is just a POTENTIAL OPPORTUNITY not a guarantee. Taxpayers who will be subject to AMT (Alternative Minimum Tax) for 2017 will likely not benefit from this potential opportunity.
Is there a way to save or stall the loss of the state tax deduction, assuming that it is lost in the 2017 Tax Legislation?
There very well may be for at least one year. Taxpayers may be able to prepay the remainder of their 2017 state taxes AND their estimated 2018 state tax liability in 2017 and get the federal tax deduction for the full amount.
The Internal Revenue Service (IRS) has not specifically addressed the prepayment of taxes; however, case law and IRS documents appear to suggest that individual cash basis taxpayers can make payments to be applied up to 12 months in the future. The American Institute of Certified Public Accountants (AICPA) has taken the position that payments of 2017 and 2018 taxes in 2017 are likely eligible to be included on Schedule A as a state tax deduction. The AICPA has gone further and tasked the AICPA SALT Resource Panel with interviewing the states to determine if they, in fact, will accept payments for future periods and record them as such.
If done properly, this could result in a permanent savings for the Taxpayer. The following requirements must be met in order to take advantage of the full benefit of prepayment:
- The state must agree to accept payments for future period
a. Oregon accepts payments by check for the next year only (2018)
- Payments must be post marked by December 31, 2017
**December 31st falls on a Sunday this year. Some post offices are open on Saturdays, but to be safe, we suggest having your payment postmarked by Friday, December 29, 2017
a. Some states require receipt (not just evidence of mailing)
- Payments must be made in the form prescribed by the applicable state
a. Oregon will only accept 2018 payments in the form of a check
- The proper form must be attached to the payment
- Taxpayers will lose the benefit if they are not eligible to take a state tax deduction in 2017 (such as a taxpayer subject to the AMT)
Any overpayment of the Taxpayer’s 2017 tax will result in reportable income in 2018, eroding the benefit of prepayment; therefore, care should be taken when determining what amounts should be attributable to which tax year. Similarly, any overpayment of 2018 tax paid in 2017 will generate taxable income in 2019 if the Taxpayer took a deduction on his or her 2017 individual income tax return.
The bills have not yet been synchronized, and we have no assurance at this time that the state tax deduction will be lost. The decision to employ the strategy above should include all aspects of your personal tax situation.
Caution should be taken to fully evaluate the status of the legislation before taking any action. The Senate and House bills are currently not synchronized and until such time as they are, this POTENTIAL opportunity is just a POTENTIAL OPPORTUNITY not a guarantee.
Consult your Delap tax advisor at (503) 679-4118 or SALT@delapcpa.com if you have any questions or would like to learn more about the 2017 Tax Legislation.
Delap LLP is one of Portland’s largest local tax, assurance, wealth advisory, and information security consulting firms, located in Lake Oswego, Oregon.