Starting 2018, the tax overhaul that President Donald Trump signed into law this past Friday caps the deductions for state and local income and property taxes at $10,000 combined. This is a significant blow to homeowners in expensive housing markets like California. If you pay more than that and itemize your taxes, it makes sense to try to pay as much of your California and local tax bill before 2018, when you can still use the old rules to take a larger deduction.
Here’s the short form of this year-end strategy: You can’t pre-pay your 2018 state income or property taxes. But you can pay the last installments of your 2017/2918 property taxes — which are not due until next year — before this year ends. If you itemize your deductions, doing so could save you big money on your federal tax bill this year compared to next year when the payments will be severely limited or not-deductible at all.
Make these payments before December 31 for the best tax benefit.
- Pay your second 2017/2018 real property tax payment on your home or vacation home which is normally due on April 10 (for California, other state dates vary) before December 31.
- If you make quarterly estimated tax payments make those state payments, normally due on January 15, before December 31.
- If you expect to owe state taxes with the filing of your 2017 returns contact us or your tax professional to make a quick estimate and make an additional tax payment to cover those taxes before December 31.
- If you have automobile registration fee notices due after December 31, but you’ve received the bill from the DMV, pay those by December 31.
For example, a married couple with taxable income of $160,000 in 2017 making an additional $3,000 property tax payment will save $750 on their federal return. That’s a pretty good return on investment for accelerating the payment by a few months.
There is another possible tax saving step available to you if you act before December 31. If you are charitably inclined and itemize your deductions on your tax returns, consider making another gift by the end of the year. A lot of deductions are going away in 2018, which will make it harder for many people to take advantage of itemized tax returns. In addition, with the standard deduction nearly doubling, the number of people who get to take advantage of deducting charitable contributions will go down in 2018. As such, you might be better off making your planned 2018 charitable contributions by the end of the year, allowing you to get that tax deduction for this year, because it might be lost if you wait. Not only that, if your income in 2018 is high enough and your tax rate drops in 2018 you will be getting a slightly better tax benefit by donating in 2017.
If you have any questions please contact Scholl & Company, LLP at (831) 758-5966 or email us at firstname.lastname@example.org and we will help you keep more of what you make.
We wish you and your family a health and prosperous New Year.