How to Reduce AGI With Prepaid Taxes

Prepaying taxes is a way to increase itemized deductions in those years. The taxes may pertain to real estate, income or business and rental properties. Itemize the deduction on the appropriate schedule for the year in which the taxes were prepaid.

Difficulty: Moderately Easy

Instructions

1. Pay your real estate taxes by December 31 to be eligible to take the deduction in the current year even though the due dates on the bill are for the following year.

2. Determine your estimated income tax liability for your state and local governments for the upcoming year. Prepay the estimated tax before the current year ends to get a current year tax deduction.

3. Calculate the income tax benefit of deducting the prepaid tax amounts in itemized deductions on Schedule A of your Form 1040 tax return. Use your allowable standard deduction in the following year instead of itemizing deductions.

4. Business taxes are deducted on Schedule C and rental property taxes are deducted on Schedule E of your tax return.

5. Compare the combined tax liabilities of the year with prepaid taxes plus the following year using the standard deduction against the total tax liabilities of the two years using itemized deductions with no prepaid taxes.

Tips & Warnings

• Excessive prepaid state and local income taxes will need to be reported as taxable income when filing your Federal tax return in the year the refund was received.