Smart timing of deductible expenses can reduce your tax
liability, and poor timing can unnecessarily increase it. When you don’t expect
to be subject to the alternative minimum tax (AMT) in the current year,
accelerating deductible expenses into the current year typically is a good
idea. Why? Because it will defer tax, which usually is beneficial. One
deductible expense you may be able to control is your property tax payment.
You can prepay (by December 31) property taxes that relate to
2016 but that are due in 2017, and deduct the payment on your return for this
year. But you generally can’t prepay property taxes that relate to 2017 and
deduct the payment on this year’s return.
Should you or shouldn’t you?
As noted earlier, accelerating deductible expenses like property
tax payments generally is beneficial. Prepaying your property tax may be
especially beneficial if tax rates go down for 2017, which could happen based
on the outcome of the November election. Deductions save more tax when tax
rates are higher.
However, under the President-elect’s proposed tax plan, some
taxpayers (such as certain single and head of household filers) might be
subject to higher tax rates. These taxpayers may save more tax from the
property tax deduction by holding off on paying their property tax until it’s
due next year.
Likewise, taxpayers who expect to see a big jump in their income
next year that would push them into a higher tax bracket also may benefit by not prepaying their
property tax bill.
More considerations
Property tax isn’t deductible for AMT purposes. If you’re subject
to the AMT this year, a prepayment may hurt you because you’ll lose the benefit
of the deduction. So before prepaying your property tax, make sure you aren’t
at AMT risk for 2016.
Also, don’t forget the income-based itemized deduction
reduction. If your income is high enough that the reduction applies to you, the
tax benefit of a prepayment will be reduced.
Not sure whether you should prepay your property tax bill or
what other deductions you might be able to accelerate into 2016 (or should
consider deferring to 2017)? Contact us. We can help you determine the best
year-end tax planning strategies for your specific situation.
