Tax Services Should You Pay Your Louisiana Individual Income Tax Before the End of 2017?
 
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As of the end of the first week of December, the United States Senate and House of Representatives have not reconciled the differences between their two versions of the Tax Cuts and Jobs Act.  One of the issues contained in both versions is their proposed changes to the individual itemized deduction for non-business taxes paid. Since the inception of the individual income tax in 1913, a deduction for these taxes including state and local income, sales and property taxes has been allowed in the U.S. tax code. However, in each version of the Act, beginning in 2018 individuals who itemized will only be allowed to deduct up to $10,000 of property taxes.

This potential change in the tax law is requiring taxpayers to consider when they should pay any 2017 state income taxes they may owe. If a payment is made before the end of 2017, the amount might be deductible in 2017.  If paid in 2018 when the state quarterly estimate is normally due and when the 2017 return is filed and if this Act passes as is, the payment would be nondeductible.

What should a taxpayer do?  What factors should be considered in making a decision on when to pay? 

Here are some of the items you should consider in making the decision:

  • You should make your payment in 2017 unless the next bullet point below applies to you.  You know it cannot be deducted in 2018 but it might be in 2017.  Other tax rules could impact the deductibility in 2017 including whether you are in an alternative minimum tax situation and limitations on itemized deductions.
  • If you are planning on satisfying your 2017 state income tax liability with purchased tax credits you may want to consider several points. First, you will not be able to claim a 2017 federal income tax deduction since you get the deduction in the year the credits are redeemed upon filing the state return.  You would still make an economic gain in the amount of the discount on the amount paid for the credit.  Additionally, using the credits in 2018 to satisfy your 2017 liability would assure that you would not get an underpayment of estimated tax penalty for 2017.  This penalty could be further mitigated by using increased withholdings rather than a quarterly estimated payment. Therefore, you must weigh the loss of the federal income tax deduction with the possibility of the underpayment penalty.

No clear cut answer exists and the right option varies with each taxpayer.  Please contact your P&N tax advisor before year end to see which alternative is the proper plan for you.

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