Chief Counsel corrects a training answer on when prepaid state income tax is deductible under the SALT cap

Plain-English summary

This is an internal Chief Counsel email answering whether a sample answer in
IRS training materials about the state-and-local-tax (SALT) deduction was
wrong. The 2017 tax law capped the SALT deduction at $10,000 and, under IRC
§ 164(b)(6)(B), treats state or local income tax prepaid before 2018 for a year
after 2017 as paid on the last day of the year the tax is actually imposed.
Chief Counsel agreed the training answer was incorrect: where a taxpayer
prepaid $4,000 of state income tax in 2017 for tax imposed in 2018, the
deduction belongs on the 2018 return, not 2017. The email also restates the
IRS's December 2017 guidance (IR-2017-210) that prepaid real property taxes are
deductible only in the year they are assessed. The bottom line is a timing rule:
prepayment does not accelerate the deduction into the earlier year.

Ruling snapshot

• Question: Is the training-material answer on deducting prepaid 2018 state income tax in 2017 correct?
• Outcome: advice (Chief Counsel agreed the answer was wrong; the deduction falls in the year the tax is imposed, here 2018)
• Key authorities: IRC § 164(b)(6); IR-2017-210

Full text (IRS public release)

ID: CCA_2019103013550464
UILC: 164.00-00

Number: 202007016
Release Date: 2/14/2020
From:
Sent: Wednesday, October 30, 2019 1:55:04 PM
To:
Cc:
Bcc:
Subject: FW: Is this answer correct in TCO Training ?

You asked us whether the “Answer to Exercise 1” in the TCO Training materials regarding the
deductibility of prepaid 2018 state income taxes in 2017 is incorrect. We concur with your
assessment that the answer is incorrect and needs to be corrected. We also agree with your
interpretation of the statute.

Under § 164(b)(6)(B), taxpayers may only deduct up to $10,000 in state and local taxes in
taxable years beginning after December 31, 2017 and before January 1, 2026. As you pointed
out, § 164(b)(6)(B) requires that a taxpayer treat state and local taxes pre-paid in tax years before
January 1, 2018 for a tax imposed for a taxable year after December 31, 2017 as paid on the last
day of the taxable year for which the tax is imposed.

The IRS issued an advisory opinion on December 27, 2017 (IR-2017-210), which explains that
whether a taxpayer may deduct for the prepayment of state or local real property taxes in 2017
depends on the date that real property taxes are assessed. Pre-payment of anticipated real
property taxes in 2017 that will not be assessed until 2018 are not deductible in 2017. However,
these prepaid taxes would still be deductible in the year of assessment.

IR-2017-210 provides two examples which illustrate how to implement the above requirement.
In Example 2, taxpayers prepaid their county property taxes in 2017 for taxes that would be
assessed for the period July 1, 2018 – June 30, 2019. These taxpayers could not deduct the
prepaid county taxes on their 2017 federal tax return. In Example 1, a county assessed property
taxes on July 1, 2017 for the period July 1, 2017 – June 30, 2018. The county billed taxpayers for
two installments of property tax, with the first installment due on September 30, 2017 and the
second installment due on January 31, 2018. In this particular case, a taxpayer that chooses to
pay the second installment on December 31, 2017 rather than in 2018 could still claim a
deduction for the prepayment on the taxpayer’s 2017 federal tax return.

In Example 1 of the TCO Training materials you provided, the taxpayer prepaid $4,000 in state
taxes in 2017 for state taxes that would be assessed in 2018. If the question had asked whether
the taxpayer could claim a tax deduction on her 2017 tax return, then the answer would be
correct that the taxpayer cannot claim a deduction. However, since the question asks how much
2

the taxpayer may deduct in her 2018 return, the taxpayer can claim a $4,000 deduction in tax
year 2018, since 2018 is the taxable year that the state actually imposes the tax.

     Answer: $4,000. Under section 164(b)(6), for purposes of subparagraph (B) of that
     section, an amount paid in a taxable year beginning before January 1, 2018, with respect
     to a State or local income tax for a taxable year beginning after December 31, 2017, shall
     be treated as paid on the last day of the taxable year for which such tax is imposed (in this
     case, 2018).

If you have any other questions, please contact me.

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