Why You Should Postpone Paying Your 4th Quarter California Estimated Taxes Until 2025
The same for the second installment of your property taxes
A short article on taxes
If you drive a car, I'll tax the street; if you try to sit, I'll tax your seat; if you get too cold, I'll tax the heat; if you take a walk, I'll tax your feet. ‘Cause I’m the taxman. Yeah, I’m the taxman.
The Taxman by George Harrison 1966
In 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act. To make the proposed tax cuts appear less conspicuous to the increasing national deficit, the tax law was made only temporary. All the provisions of this tax act expire in just a short 13 months from now, on December 31, 2025.
One of the most controversial and misunderstood changes in the tax law was the capping of the state and local taxes (SALT) deduction at $10,000 per taxpayer per year. Unfairly, that ceiling is per taxpayer, which translates to two married individuals being limited to the same $10,000 that a single taxpayer gets by themselves—a clear marriage penalty.
The MSNBC crowd has been claiming that the Trump administration was punishing the blue states with high state income taxes because they did not support him. FOX countered that the rest of the nation was subsidizing the blue states as their state tax deductions were reducing the overall tax revenue to the strained U.S. budget.
Both sides are missing one of the conceptual reasons why taxpayers were allowed to deduct state income taxes. It was because the same taxpayers’ income was taxed twice (double-taxed). As an example: if a taxpayer earned $100,000 and $5,000 was immediately pulled from their paycheck and sent to the California Franchise Tax Board, the taxpayer’s constructive income was really only $95,000. Yet, the IRS still calculates the taxpayer’s income as $100,000. This means, the IRS was taxing the $5,000 in California taxes the taxpayer never really received—adding to George Harrison’s lyrics by taxing your taxes. By allowing taxpayers to deduct the $5,000 in California taxes from their federal tax return, the IRS was mitigating the effects of this double taxation.
President-elect Trump proposed returning the SALT deduction
To incentive voters, candidate Trump proposed many new tax law changes like not taxing overtime, tips, or social security. This past weekend, Karen Hube, of Barron’s, wrote that if all of Trump’s promised policies were enacted, it would increase our deficit by a staggering $9 trillion. Trump’s campaign proposals ain’t all going to happen.
One of Trump’s campaign proposals involved a one-eighty on his 2017 principle of limiting SALT tax deductions. Commentators in the Barron’s article speculated that Trump knows it would be too costly to reverse the SALT ceiling, so he will seek a compromise. He might slightly raise the $10,000 limitation or eliminate the marriage penalty. How might this affect you?
Why you should postpone your California estimated taxes and property taxes until 2025
Fourth quarter California estimated taxes are not due until January 15, 2025. Similarly, while the first property tax installments are due next week, the second property tax installment is not due until April 10, 2025. Pre-Trump, tax advisors generally recommended their clients accelerate the estimated tax payments and the second installment of property taxes into the current year. Get the benefit of the tax write-off as soon as possible.
But here’s how to play the SALT now.
As soon as congress convenes, preserving or extending the expiring 2017 tax law will be at the top of their agenda. There’s a greater than 95% chance their tweaks will not be effective until 2026. Still, there’s no benefit to paying your fourth quarter 2024 California estimated taxes or second property tax installment until January 15, 2025. Even if there’s a remote 5% chance that Congress and Trump will make the changes effective for 2025, by stalling your estimated state payments and second property tax installments into the new year, you might get to take advantage of either an extra $10,000 through the elimination of the marriage penalty or an increase in the SALT limit to say $25,000. Why not wait til January to make your payments?
And if the changes to SALT don’t become effective in 2026, just wash and repeat. Everything in this article, delaying your 2025 SALT payments until 2026, will be applicable. Just keep this on your radar about the benefits to timing your estimated and property tax payments to the year SALT is changed.