Prepaying SALT isn’t an Option
December 17, 2017
As widely expected, congressional negotiators limited the state and local taxes paid deduction in the final conference report issued on Friday. The limitation was modified from the original House and Senate plans. Starting in 2018, individuals would see their state and local taxes paid deduction capped at $10,000 for income, sales, and property taxes.
Expecting a limitation, a number of tax advisers started to suggest that taxpayers should prepay their 2018 tax liability in 2017 to maximize the deduction before the cap went into effect. However, the new bill shuts the door on this tax planning strategy. The bill states that taxes paid for any tax year beginning in 2018 is only deductible in tax years after 2018.
However, this restriction is only binding on income taxes, which seems a bit off at first glance. But it makes rational sense given the way the SALT deduction is used in practice.
First, most individuals don’t deduct their sales taxes. The vast majority of individuals—except those in no-income-tax states—deduct their income taxes, rather than their sales taxes, under the current structure. For the limited individuals who do deduct state and local sales taxes, they largely use an Internal Revenue Service calculation that approximates their sales tax liability. Few individuals save all of their sales tax receipts during the tax year.
Second, individuals also don’t generally remit sales tax liabilities. (This is why internet sales matter greatly to states.) Functionally, it would be difficult for an individual to prepay sales taxes, so that restriction isn’t necessary.
Additionally, with the new $10,000 cap, many individuals taking the new SALT deduction would likely be maxed out under income, so the property tax side becomes less important. But really, there is an underlying ease of payment issue here as well. Property tax payments frequently cross calendar years. Many localities tax in arrears, so it’d likely be challenging to apply the limit to property taxes.
As the Tax Cuts and Jobs Act seeks to simplify the tax code, a last-minute provision closed a potential new tax-planning strategy germinating before the bill even passed.