Is it worth paying taxes early to get a deduction early? Many more taxpayers will have to ask that question this year for the unfortunate reason that the increase in the top regular rate to 39.6% makes their regular tax higher than the alternative minimum tax. While it’s cold consolation, you can use your deduction for state tax payments when you aren’t subject to AMT.
First you have to make sure you can use the deduction at all. You can’t use a deduction for taxes paid on your federal return if you don’t itemize, or if you are subject to AMT. If you pass these tests, then you should ponder if you are going to be in a much higher bracket next year. Assuming that you are in the same bracket for both years, and that no change in the tax law will affect your deduction, it’s a time-value-of-money question.
The charts below show the tax benefit of prepaying $1,000 of state and local taxes at the federal tax brackets. The first bracket shown is the top Iowa rate, to enable Iowans to determine the value of prepaying federal taxes. It shows the present value at several key payment dates:
January 15: Federal fourth quarter 2013 payments are due
January 31: due date of Iowa fourth quarter estimated taxes.
March 1: due date of first Iowa property tax installment.
April 15: due date of most state individual tax returns.
April 30: due date of Iowa individual tax returns.
September 1: due date of second Iowa property tax installment.
If the benefit is in green, prepayment makes sense. If it is red, the time value lost by paying early exceeds the benefit of accelerating the deduction by a year, assuming that the benefit will arrive on April 15.
This chart is only accurate assuming all of its underlying assumptions are met, so use it with caution. It does illustrate that prepaying January taxes usually makes sense, but prepaying September taxes seldom does.
Come back tomorrow for another installment of our 2013 year-end tax tips series!
Howard Gleckman, Finance Chairman In-Waiting Ron Wyden Is A Tax Reformer (TaxVox):
The 64-year-old Wyden, who has a history of proposing creative, ambitious, and sometimes controversial ideas, initially sponsored a tax code overhaul in 2010 with former GOP senator Judd Gregg of New Hampshire. After Gregg retired, Wyden found another GOP cosponsor in Dan Coates of Indiana. Wyden-Coates follows the broad outline of the original Wyden-Gregg plan.
For individuals, it would set three rates—15-25-35. The top bracket would kick in at $140,000 for couples filing jointly. It would repeal the Alternative Minimum Tax, nearly triple the standard deduction, and create a 35 percent exclusion for long-term capital gains and dividends (equal to a rate of 22.75 percent for top-bracket taxpayers). It would eliminate the tax advantages of many employee benefits–but not employer-sponsored health insurance–and simplify tax-preferred savings.
While the plan would preserve most other individual tax preferences, the very large standard deduction would sharply limit the number of taxpayers who take them (even today, fewer than one-third itemize).
Wyden-Coates would cut the corporate rate to 24 percent from 35 percent.
I can think of a better tax reform, but Wyden-Coates would be a huge improvement over what we have.
Cara Griffith, Enabling an Informed Debate (Tax Analysts Blog):
A transparent tax system, in which there are no “secret tax laws,” is a better tax system in that taxpayers more clearly understand the laws they are required to comply with, tax officials can more easily administer the law, and both sides can engage in a more informed debate about tax policy.
I would add that the transparency should extend to subsidies, like Economic development tax credits, that are run through state tax returns.
Jason Dinesen, Capital Losses and Tax Planning
Jim Maule, How to Lose a Charitable Contribution Deduction. If you leave an anonymous gold coin or jewelry piece in a Salvation Army kettle, it does no good on your 1040.
TaxGrrrl, 12 Days Of Charitable Giving: Ride For Reading “Our featured charity, Ride for Reading, delivers books to children in underserved communities… by bicycle!”
TaxProf, Court: Home Depot Cannot Use Out-of-State IP Affiliate to Shift Income From Arizona, Don’t expect state courts to uphold tricks that reduce state revenue.
Arnold Kling describes Two Views of Obamacare, and explains how it is far from a “market approach.”
The flip side of the “Facebook stock option loophole”: Mark Zuckerberg’s $2 Billion Tax Bill (TaxProf). People who complain about the deduction for stock option compensation never mention that the same amount is income to the option holders, usually at higher rates.
Memory Lane beckons at Robert D. Flach’s place with 2013: THE YEAR IN TAXES – PART ONE:
Perhaps tied for the top tax story of the year (with the death of DOMA, which I will discuss later) is the David-versus-Goliath victory of three independent tax return preparers who felt the cost of the IRS mandatory RTRP tax preparer regulation regime, especially the annual CPE requirement, was “prohibitive” for their small practices and joined with the Institute for Justice to challenge the licensing program in federal court in Loving v IRS.
The Critical Question: Did Tenth Circuit Help KPMG Weasel Out Of Liability To Buy.com Founder? (Peter Reilly)