And a side note on the economic growth impacts, the US should definitely pick up some foreign economic gains not in need the closed model due to increased competitiveness of the 20% corporate tax rate (uniform on both bill versions now) and the relative low tax on repatriating offshore profits to be put to use here.
Joint Tax models posit a relatively closed U.S. economy rather than an open global capital market that could finance U.S. deficits.[/quote]
DeLong, Leiserson, Krugman, and others have previously debunked that bogus closed/open theory.
But that was only because they utilized the farcical fairy dust assumptions the GOP wanted used, which ain’t gonna happen.
Indeed. Even after accounting for the fake fairy dust “dynamic” scoring the GOP kept whining about, it only added a measly $400 billion.
According to the non-partisan Congressional Joint Committee on Taxation, by 2027, Americans earning between 40k and 50k annually will collectively pay an additional $5.3 trillion in taxes, while Americans with incomes over $1 million annually will collectively get a tax cut of $5.7 trillion.
Apologies if this was already covered, I didn’t read all replies. Also apologies if this is a stupid question, just trying to think of ideas, would love someone smarter than me to poke a hole in this.
Anticipating state income tax deduction disappearing, what if I prepay all my 2018 taxes by the end of 2017 with an estimated 2018 payment? And then reduce state withholding to 0 for next year. Can I itemize this in 2017? And how does this come back to bite me if at all?
And if this would actually somehow work, I wonder how many years in advance CA would let me pay right now.
Aside from having to front the money and TBD on the final tax rules, I think this should work. 2017 will probably be the last year to itemize large state income tax payments. I was thinking about making a large payment myself. If you’re in the ~30% federal bracket, paying an extra $100 to CA would give you a deduction worth about $30 (after tax savings).
And if this would actually somehow work, I wonder how many years in advance CA would let me pay right now.
There may be some issues with taxable refunds at the Federal level. If you overpay more than your 2017 state tax liability, you’ll get a taxable refund for 2018 where you have to pay federal income tax on the excess.
He’s asking if he pre-pays his 2018 estimated taxes in the 2017 calendar year. It’s not his 2017 state tax liability, it’s 2018. I’m not sure if you can pay estimated taxes for 2018 in 2017 though.
Good point. I checked and my state will let you pay estimated taxes up to 1 year out, so currently you can pay Q3/Q4’17 and Q1-Q3’18. I don’t know about CA, this is going to be state specific.
As long as you’re sure you’re going to owe them, this seems like a pretty high return option since then there’s not the taxable refund issue. If your estimated taxes for 2018 are due, on average, in mid to late 2018, you’re prepaying 0.5-1 year early. For this, you get a return of your marginal tax deduction value, which is roughly your marginal federal tax rate (although that could be lower if you’re at the edge of a federal bracket, or the itemized vs standard cutoff, or your federal deductions are being phased out).
Say you’re Federal rate is 25%. That’s not just a 25% return in less than a year - that’s a tax free 25% return, since unlike a bond or CD, you keep the whole amount in terms of a lower federal tax bill. So compared to a taxable investment with the same properties, your effective return is 25% / (1 - total marginal tax rate), where you need to include your state tax as well as federal in the denominator. Say CA charges 10%, so that’s 25% / (1-35%) = 38%. Where else are you going to get a 38% return for less than a year?
[quote=“xerty, post:448, topic:1661, full:true”]
Good point. I checked and my state will let you pay estimated taxes up to 1 year out, so currently you can pay Q3/Q4’17 and Q1-Q3’18. I don’t know about CA, this is going to be state specific.
As long as you’re sure you’re going to owe them, this seems like a pretty high return option since then there’s not the taxable refund issue. If your estimated taxes for 2018 are due, on average, in mid to late 2018, you’re prepaying 0.5-1 year early. For this, you get a return of your marginal tax deduction value, which is roughly your marginal federal tax rate (although that could be lower if you’re at the edge of a federal bracket, or the itemized vs standard cutoff, or your federal deductions are being phased out).
Say you’re Federal rate is 25%. That’s not just a 25% return in less than a year - that’s a tax free 25% return, since unlike a bond or CD, you keep the whole amount in terms of a lower federal tax bill. So compared to a taxable investment with the same properties, your effective return is 25% / (1 - total marginal tax rate), where you need to include your state tax as well as federal in the denominator. Say CA charges 10%, so that’s 25% / (1-35%) = 38%. Where else are you going to get a 38% return for less than a year?
[/quote]Keep in mind that if you are in the AMT territory, or if such a prepayment would cause you to enter the AMT territory, then this strategy would not work at all, as the deduction would be disallowed.
[quote=“xerty, post:439, topic:1661, full:true”]
Quick summary of where the middle of the two bills may end up. YMMV on the remaining haggling, but it looks like this is likely to pass in some similar form at this point.
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[/quote]The Senate plan is problematic on a number of different levels. First, deferring the corporate tax cut into 2019 would cause significant problems in 2018, as the companies would have every incentive to defer just about everything until the following year. This alone would cause issues with the economic growth in 2018.
Second, if they are retaining the AMT and simply increasing the exemption, then reducing the regular tax rates would have no impact on those paying the AMT, as you pay the higher of the two. In fact, reducing the federal income tax would only push more people into the AMT, as you pay the higher of the two taxes. Perhaps they’re somehow altering the structure of the AMT to prevent this from happening, but I haven’t seen any articles that mention this.
Thanks for bringing up the taxable refund thing too. The way I’m reading it I may be able to super overpay my 2018 estimated tax as well and itemize it all in 2017. This will trigger a refund in 2019 of 2018 taxes, but because unwind itemize in 2018 and claim the deduction, it would seem maybe the 2019 refund won’t be taxable.
This seems wrong, but needs more research. It would stand to reason though that if this deduction goes away in 2018, the 2019 return shouldn’t even need to ask about a refund, the refund should never be taxable again if the deduction is no longer allowed.
Unless they change the Federal rules about taxable refunds, which is possible I guess but I haven’t seen anything to suggest that, if you overpay your 2018s in 2017 and take a big 2017 deduction, you will end up with a 2019 taxable refund to the extent that you paid even more in 2017 than you end up owing for 2018. But, barring AMT and similar issues that might make that 2017 deduction less good than you might superficially think, you should still do fine prepaying your whole 2018 state tax liability.
Based on that article, any refund received in 2018 would be taxable on 2018 taxes because I itemize in 2017. However the big refund for overpayment wouldn’t actually be received until 2019, because I am overpaying 2018 taxes.
This would then be taxable in 2020 on my 2019 tax return, however again just according to that linked article the refund received in 2019 wouldn’t be taxable because I would not be itemizing and deducting state income tax in 2018.
It says In general, if you didn’t deduct state and local income taxes last year (2018) you don’t need to pay taxes on your state and local tax refund this year (2019).
However I’m assuming in general does not apply to this situation where I’m trying to find a loophole and the government will get theirs. Who knows.
I’m in the same boat (loss of SALT deduction will cause me to switch to taking the std deduction for 2018) but I don’t see how what you are proposing will work (paying estimated 2018 local/state taxes in 2017).
Looking at my 2016 tax form (State and Local Tax Deduction Worksheet) I do not see any opportunity to deduct state income taxes for the next year, there are only lines for deduction 2016 state taxes paid in 2016, and 2015 state taxes paid in 2016 (e.g. 4th Quarter estimated tax payments) There was no line for the next years taxes (which were 2017 for my 2017) The closest thing would be line 7 "Other amounts paid in 2016 (amended returns, installment payments, etc.) " but I’m not sure that this belongs there.
I’d love to do this too but I have trouble believing such a big loophole would have been missed. Just to be clear I already pay quarterly estimated fed/state taxes (1099 contractor)
Instructions for line 5 schedule a for 2016 indicate you can include any estimated state and local taxes paid in 2016. It does not explicitly specify that the estimated taxes have to be for the current or prior tax years or that future year estimated payments cannot be included. It seems reasonable that any amounts paid in 2017 should be included on the 2017 return no matter what year they are for.
If you elect to deduct state and local income taxes, you must check box a on line 5. Include on this line the state and local income taxes listed next.
State and local income taxes withheld from your salary during 2016. Your Form(s) W-2 will show these amounts.
Forms W-2G, 1099-G, 1099-R, and 1099-MISC may also show state and local income taxes withheld.
State and local income taxes paid in 2016 for a prior year, such as taxes paid with your 2015 state or local income tax return. Don’t include penalties or interest.
State and local estimated tax payments made during 2016, including any part of a prior year refund that you chose to have credited to your 2016 state or local income taxes.
Which doesn’t say the estimated payments have to be for that tax year, so I think any estimateds should be ok but I’d double check that before I actually did it. That said, the guys over a TaxProTalk are adopting a “wait and see” approach for now.
If there’s no AMT issue, even overpaying a 2017 state tax and getting a 2018 taxable refund might be good if your tax bracket falls between 2017 and 2018 with the tax cuts.
Here’s the general discussion from that forum of the tax bill generally:
You can also overpay state income taxes for tax year 2017, and have the refund be applied to tax year 2018 estimated taxes. This would avoid a situation where your state doesn’t know what year to apply your taxes to.
[quote=“MyBanker, post:458, topic:1661, full:true”]
You can also overpay state income taxes for tax year 2017, and have the refund be applied to tax year 2018 estimated taxes. This would avoid a situation where your state doesn’t know what year to apply your taxes to.
[/quote]Overpaying 2017 state income taxes will create a situation where the over-payment will be taxable on your 2018 tax return, regardless of whether you take the overpayment as a refund or applied to your 2018 tax bill.
It’s not the bottom line because it’s misleading. Two things, 1. The tax cuts expire after 2025. Of course taxes will go up if the cuts expire. Unfortunately, this is how tax bills have to be written when a party doesn’t have a filibuster proof majority. 2. The tax cuts propose that the brackets change with inflation (which has always happened), but they will change slightly slower. To say that a person that gets a cut will pay more because over time because their bracket will change slower than before (but before, they also weren’t getting the cut) is misleading.
If someone saves $850 in taxes (over the current law) in 2019, but only $200 (over the current law) in 2019, that’s $1,000 in savings, not a $600 tax increase. The question is, where is the break even point? If I’m saving $800 in 2019, $200 in 2020, and then paying more from 2020-2027, then these cuts suck. But if I’m saving in 2019-2022, but paying more in 2022-2027, it would depend on how much I saved and then paid. According to the WaPo charts, the avg taxpayer making $50-87k would save $850 in 2019, and STILL save $50 in 2027. Yeah, the cut pretty much vanishes in 10 years, but you can’t fairly call it an increase either. 8 years of savings is 8 years of savings, any way you slice it.