“To Prepay or Not to Prepay, That is the Question”
In light of the pending tax reform bill, DSJCPA has received numerous phone inquiries, texts and emails asking us about prepaying certain itemized deductions. To prepay or not to prepay; that is the question. While the outcome of the bill remains uncertain, there are still opportunities for tax savings.
The tax reform bill is proposing substantial changes to itemized deductions for individual taxpayers under both the House version and the Senate version. Currently, Taxpayers are allowed to deduct the greater of their standard deduction or the total of their itemized deduction. Your total itemized deduction includes expenses such as state and local income taxes, property taxes, mortgage interest and charitable donations, to name a few. Under the proposed bill, state and local income taxes would be repealed completely; further, property taxes would be limited to $10,000 and mortgage interest would be capped as well. Usually, homeowners find that their itemized deduction is greater than the standard tax deduction; however, under the latest proposed legislation, the majority of taxpayers will find that the standard deduction will be greater than their itemized deduction.
What exactly does this mean for millions of taxpayers? Well, beginning in 2018, and moving forward, the average taxpayer will no longer receive a federal tax benefit from: their state and local income taxes, their property taxes, mortgage interest, and yes, even charity. In lieu of this, the new tax law nearly doubles the current standard deduction making it nearly impossible for most taxpayers to itemize.
While this all sounds rather bleak, there is some good news. Until 2017 is over, individual taxpayers can still itemize and you may want to take advantage of that opportunity before potentially losing it in the coming year. That leads to the million-dollar question: What can I prepay today to take advantage of the current itemized deduction? We have two recommendations for you but they both come with strings attached.
Taxpayers who want to prepay their property taxes can do so (and get this year’s tax benefit) provided they also consider two important factors. First, they cannot already be subject to the Alternative Minimum Tax (AMT) or, as a result of the additional deduction, find themselves subject to the AMT. In this case, the benefit would be lost. Keep in mind that while the new tax bill also proposes repealing the AMT for 2018 and forward, for 2017, the AMT is still in full effect.
Second, the taxing municipalities that collect your tax may not accept a prepayment. Many municipalities will only accept prepayment for taxes that have already been assessed. For example, a taxpayer may get a school tax bill covering the period from July 2017 through June 2018. The first half is due in 2017 and the second half is due in early 2018.
Municipalities will accept prepayment for the first half since that has already been assessed; however, they will NOT accept prepayment for any additional 2018 property taxes. We recently spoke with several municipalities in New York State who have informed us that they will not accept prepayment of non-assessed taxes. They have affirmed that all checks received for non-assessed taxes will be returned.
Taxpayers who want to be extra charitable this year should most definitely do so. Under the proposed tax law, your charitable contribution is one of the few protected expenses. Having said that, with most taxpayers expected to use the standard deduction in 2018, the tax benefit of a charitable contribution will be lost. Taxpayers may want to boost their giving this year to take advantage of the current year tax benefit; keep in mind, however, that charitable contributions are limited to 50% of your adjusted gross income.
Many taxpayers also like to gift shares of stock, especially stock with a low-cost basis. By gifting this stock, taxpayers can avoid any associated capital gains while receiving a tax benefit of a charitable contribution on the full fair market value of the stock at the time of the gift.
Another tax strategy that taxpayers can utilize is a donor-advised fund to manage their charitable giving. You can make a donation of either cash or appreciated investments and take a current tax deduction for the full amount of that contribution. Then, over time, you can direct the use of the funds by giving to charities of your choice when you desire.
While charitable giving this year is valuable economically for the taxpayer, it will also benefit your favorite non-for-profits who will likely be losing substantial contributions in the years to come.
The current and proposed tax laws are complicated and constantly changing. We recommend you contact DSJCPA before making any decisions or taking any action that might impact your tax liability.
Gigi Boudreaux, CPA, Partner Tel: (516) 541-6549 Email: firstname.lastname@example.org