Tax Tip 5: Prepay State and Local Taxes (SALT)

If you’re looking to reduce your federal tax bill before year-end, prepaying state and local taxes (SALT) can be a smart move – but only if you play by the rules. Here’s how a high level look at how this works and what you need to know.

What is the SALT Deduction?

• The SALT deduction lets you write off state and local income, property, and sales taxes on your federal return.
• Sounds great, right? Well, there’s a catch…the 2017 Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at $10,000 for individuals (or $5,000 if you’re married filing separately).
• This cap can be especially frustrating for those in high-tax states like California, New York, or New Jersey.
How Prepaying SALT Works

By paying certain taxes before December 31, you may be able to claim the deduction for the current tax year. This is especially helpful if:

• You expect your income to increase next year, potentially bumping you into a higher tax bracket.
• You think there might be changes to the SALT cap in the future, and you want to lock in the deduction now.

What Can You Prepay?

1. State and Local Income Taxes:
2. If you pay quarterly estimated taxes, you can make your fourth-quarter payment (normally due in January) before the year ends. This shifts the deduction into the current year.
3. Property Taxes:
   • In some areas, you can prepay property taxes for the next year.
   • For example, if your 2025 property taxes are billed early, paying them in December 2024 might make them deductible for this year. (Check with your local tax office to confirm this option.)

What You Cannot Prepay

• Taxes Not Yet Assessed: If the tax hasn’t officially been billed or assessed by your state or local government, you can’t prepay it and claim the deduction. It’s important to ensure the tax liability is clear and payable.

Key Things to Keep in Mind

1. The $10,000 SALT Cap:
   • If you’ve already hit the $10,000 deduction limit (e.g., between property taxes and state income taxes), prepaying more won’t give you any federal benefit.
2. Alternative Minimum Tax (AMT):
   • If you’re subject to the AMT (a parallel tax system that disallows certain deductions), prepaying SALT won’t lower your federal taxes. This is something to watch if you’re in a higher income bracket.
3. Cash Flow:
   • Prepaying taxes can be a great strategy, but only if it doesn’t strain your cash flow. Make sure you can afford the payment without disrupting your personal or business finances.
4. State Rules:
   • Not all states allow prepaid taxes to be deducted. Double-check with your state’s tax laws or consult your CPA before you pull the trigger.

Final Thoughts

Prepaying SALT can be a smart move to lower your federal taxes, but it isn’t for everyone.
Whether it works for you depends on:

• How close you are to the $10,000 SALT cap.
• Whether you’re subject to the AMT.
• Your state’s specific rules on prepayments.

To make the most of this strategy, talk to your CPA or tax preparer. They can help you figure out if this approach makes sense for your situation and ensure you don’t run into unexpected complications.