With days to go, Sacramento-area residents and millions of others nationwide are scrambling to figure out if prepaying their property taxes or making other financial moves before the end of the year could save them money under the Republican tax overhaul.
The short answer, according to tax professionals, is that those whose family incomes put them in the middle and upper-middle classes are more likely than wealthy or low-income people to save by paying their April 2018 tax installment by Sunday in California.
They’re taxpayers who itemize state and local property taxes, mortgage interest, charitable contributions and maybe a few other items. They don’t take the current standard deduction of $12,700 for a married couple. Nor do they have the heftier incomes and deductions of more-affluent households that pay the federal government’s alternative-minimum tax, or AMT.
“The people who are going to benefit are people who don’t have a ton of itemized deductions already,” said Kathleen Platz, a certified public accountant in the Arden Arcade area of Sacramento.
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Platz and others said taxpayers should look at their 2016 tax returns to see if they took the standard deduction or paid any alternative-minimum tax. If so, they probably won’t get any benefit from paying their April tax installment in December. Why? Because those who take the standard deduction don’t itemize, and those who pay the AMT can’t deduct property taxes.
“If you pay as much as $1 in AMT, it won’t do you any good to prepay taxes,” Platz said.
On the other hand, a couple with a combined income of, say, $170,000 a year and whose itemized deductions are in the $20,000 to $25,000 range would likely benefit from prepaying their April tax bill.
Someone in the 25 percent marginal tax bracket who makes a $3,000 tax payment now could save $750.
The Republican tax plan signed Friday by President Donald Trump makes the most sweeping changes to the federal tax code in more than 30 years. The nonpartisan Tax Policy Center says that all income groups on average will get a reduction, though the largest tax cuts as a percentage of income go to the top 5 percent of taxpayers.
The Republican plan nearly doubles the standard deduction for a married couple from the current $12,700 to $24,000 but caps the amount of state and local taxes that can be deducted at $10,000.
That combination means most households who itemize will no longer have reason to do so. Republicans have touted that change as simplifying tax returns. It also means that paying the next property tax installment, as scheduled, in April will provide no federal tax benefit to most filers in 2018, but it still might lower 2017 bills if paid now.
That’s caused many to rush to county tax collector’s offices to prepay the second installment of their 2017-18 taxes normally due April 10.
Long lines at cashiers’ windows in Sacramento and other counties have been the norm in recent days. Payments can also be made online in many counties through Sunday or sent, preferably by certified mail, through Saturday.
Three tax scenarios
Does it makes sense to prepay your property taxes? How the new tax law will impact three families of different sizes and adjusted gross incomes (all couples filing their taxes jointly):
The IRS announced Wednesday that prepaying 2018 state and local real property taxes assessed in 2017 may be tax deductible, settling a question that arose under tax plan.
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About 325,000 tax filers in the Sacramento region itemized property taxes on their 2015 federal tax returns, according to the latest IRS statistics. That’s about one-third of the tax returns filed in 2015 in Sacramento, Placer, Yolo and El Dorado counties.
How many could benefit from paying their property taxes early remains in question. The answer depends greatly on individual circumstances including filing status, itemized deductions, adjusted gross income and other factors that can usually only be found on tax returns.
Because most people haven’t prepared their 2017 filings for the IRS yet, their 2016 returns are probably the best tools to help them decide if prepaying the April property tax installment is worth it, accountants said.
For high-income earners, the most important factor is “whether AMT has reared its ugly head” in the past, said Mark Castellucci, an accountant in Davis. “If you paid AMT in 2016 and your tax situation is reasonably similar in 2017, then it is unlikely to help you to accelerate any income tax or property tax payments.”
About 38,000 tax filers in the four-county area paid alternative minimum tax in 2015, IRS data shows. That’s about 4 percent of all tax filers in the Sacramento region.
The AMT was enacted by Congress in the late 1960s, after cases came to light of wealthy individuals claiming so many deductions that they paid virtually no federal income taxes. More recently it’s affected upper-income earners along with the truly wealthy.
Castellucci said those who currently fall somewhere between taking the standard deduction and paying the alternative minimum tax might also benefit by making their January mortgage payment early, doubling up on charitable contributions and paying work-related expenses that aren’t reimbursed by an employer.
All can be deducted in 2017 but may not be deductible, as a practical matter, for a sizable portion of the population next year.
“There are a lot of people who are going to be using the standard deduction in 2018,” Castellucci said.