Tax Planning for 2018 going forward - Q&A, no politics!

Parent Cafe
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Because the AMT tax is based on your income without deductions. Your regular tax is based on income minus deductions, and that can make the taxes owed either less or more than the AMT tax.

Here’s an example with made-up numbers and rates to simplify:

You have $100K in income, and $20K in deductions for $80K in taxable income, and are in the 30% tax bracket, and the AMT rate is 22%.

Regular tax: (80K) * .30 = $24,000
AMT: (80K + 20K) * .22 = $22,000

Since regular tax is higher than the AMT tax, you pay the regular tax.

Now prepay an extra $10K in property taxes, so your deductions are now $30K, and taxable income $70K:

Regular tax: (70K) * .30 = $21, 000
AMT: (70K + 30K) * .22 = $22,000

That extra $10,000 in deductions made the AMT tax amount higher than the regular tax, so you pay the AMT amount of $22K. That extra $10K, which normally would save you (10K * .30) = $3K in taxes, saved you $2K, but you lost $1K to AMT.

So if you are not in AMT yet (that is, your regular tax is higher than the AMT tax), you will get some benefit to the higher deduction, but at some point AMT tax becomes higher and beyond that you lose the benefit of the deduction.

If your AMT tax amount is already higher than the regular tax amount, the extra deduction gains you nothing.

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The AMT aspect of this is very complicated. Here’s my thinking, which may or may not help anyone else.

My property taxes and state income taxes are well over the 10K limit. Heck, my state income taxes and HALF my property taxes are still over 10K, so I had nothing to lose by advancing payment of the second half of the 17-18 FY bill into 2017. Well, except the interest I could earn on those dollars before the 4/18 final due date for the payment. I ran a quick check using the 2016 tax program and the extra money would not have put me in AMT territory last year, so I’m reasonably sure that I’m okay this year. If I’m wrong, I don’t have to claim a deduction for the extra taxes paid. In fact, I can tinker with the numbers and claim just the amount that benefits me and keeps me out of the AMT zone or yields the lowest tax liability. That is, there is no law that says you have to claim ALL of a given deduction, and, as I noted above, that extra property tax payment would not give me ANY benefit on my 2018 return. .

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Empty comment since CC wanted to post #221 three times,

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Empty comment since CC wanted to post #221 three times.

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Really…so if my tax payment takes me into AMT zone…I just don’t use it on my taxes? I’ll have to remember that…and run it both ways!

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There’s no need to do that level of tinkering in this situation, once you are in AMT territory the tax you owe does not change if you take a larger deduction.

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If you are not currently paying AMT, there is benefit to taking the extra deduction right up until you hit AMT. After that, extra deductions don’t lower your tax.

But if you won’t be able to use the deduction next year, then there’s no reason to mess around figuring out whether to take it or not, or how much of it to claim. Just take it all, and your taxes will be lowered to the extent possible.

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My town (and I think most towns in my state) is on a July 1 fiscal year. The initial bill on July 1 tells you the amount for the year, but then we get billed quarterly for that quarter’s tax.

So you can pay the entire balance due at any time, but at this point only the next 6 months have been billed. After that, the amount is not known because of the factors I listed above. I guess 6 months is better than nothing.

Although since we pay AMT, there is no point for us.

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I was under the impression that the AMT threshold factored in certain deductions, but it’s very possible that I am mistaken. Anyway, for me, it doesn’t matter, since I have nothing to lose by making the extra payment this year. :-t [emoji was the closest one I could find to hitting myself over the head with a hammer]

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I’ve seen on other sites, an emoji for banging your head into a brink wall. We need that one. :slight_smile:

It doesn’t factor into whether you are allowed to claim the deduction on your schedule A, but it does control whether that deduction will lower your tax bill.

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So I stood on line this morning for 1 1/2 hours to pay my bill. By the time I left I’d estimate line was at least two hours long. They were very organized and had someone go around in order to ask for your address so bill would be ready as soon as your turn came at the windows. It was funny once you got near the front of the line (it snaked around to near the entrance into town hall) and saw the look on peoples faces when you told them where to go to get to the end of the line. Just finding a spot in the parking lot was challenging and when I left people were having to park across the street at the library. Didn’t help that the temperature is the single digits.

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@notrichenough, as I mentioned before we are subject to AMT, one reason is NJ property tax is ridiculously HIGH!!! I expect prepaying Jan-June 2018 property taxes (already billed) will indeed push up AMT, but to what degree, who knows? I like the number example you gave a couple of pages back.

So I am thinking of prepaying the tax (have until tomorrow to make up my mind), when I file 2017 income tax (we use turbo tax), I plug the prepaid tax amount in and see what happens, I can always back it out and not report it as paid. I guess the only down side is I won’t have that money in my bank account for a few more months earning 0.1% interest!

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I’m doing the @Hopeful820 thing. I paid…and I’ll just see how it works when we do our taxes. I’ll back out any payment if it really makes our taxes higher…TBD.

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I wasn’t allowed to prepay 2018 property taxes since what we owe won’t be determined until the spring. Our tax bills are generated in June, with the first payment due July1st, so, according to the IRS notice, we can’t prepay. I did pay the 2nd installment of our 2017 tax bill which is due Jan1, but we usually pay that one at the end of Dec unless we expect to get hit with AMT.

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Same here, although not a prepayment, strictly speaking. I could have waited to pay the property taxes, either two parts (end of January 2018, end of July 2018) or one (end of January 2018), but I decided to pay them this week, which means I’ve paid two years’ worth in 2017. Thank you for the tip above that I have the option of not reporting the entire amount as paid, if doing so takes me out of AMT territory.

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What’s with the long lines to pay? Can’t you mail it in?

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If you use a tax program like TurboTax or TaxACT to do your taxes, one thing you can do is open up form 6251 in last year’s return and see if your program filled it out.

If so, take a look at lines 33 and 34. Line 34 will be larger if you are not already paying AMT. But if you subtract line 34 from line 33, and divide this by your incremental rate, that will tell you approximately how much more you can take in deductions before you hit AMT.

Example: line 33 is $20,000, line 34 is $21000, and your income puts you in the 28% bracket.

(21000-20000)/0.28 = $3571, so you can take another $3571 in deductions before you hit AMT.

If your income and deductions are similar to last year this should give you a pretty good idea.

If you know you will already be paying AMT when you do your 2017 return, there is no reason to prepay your taxes as higher deductions cannot lower your tax at this point. It cannot raise your taxes either if you do prepay, because AMT is calculated without counting any deductions.

As always, YMMV, IANAA, free advice is worth every penny.

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I guess I am not explaining it well. You don’t want to take yourself out of AMT by not claiming deductions. If your regular tax is higher than your AMT, then more deductions save you money.

You at least want to claim enough deductions if you can to make your regular tax equal your AMT. At this point, more deductions do not save you money, but taking fewer will cost you money.

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Some localities are allowing mail, some are requiring the bill to be paid in person, some allow a check in a drop box.

It varies by locality, you need to check. Don’t just assume you can mail in a check.

ETA: wow I got bleeped on drop box (as one word)

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^ my town has announced that checks dated and postmarked in December will be counted for 2017. Yet the lines are out the door at town hall.