Build Back Better Act, Property Taxes & Q4 Estimated Tax Payments

Rumor has it the Senate is ending session and heading home for the year tomorrow, and their version of the Build Back Better Act (see my last update for what’s included in the House version of the bill) hasn’t even been drafted, so it seems very very unlikely that anything will pass by end of year. That means at least a temporary end to Advance Child Tax payments, the expanded Earned Income Credit, and host of other pandemic-related programs. It also means no changes to retirement plans for now (i.e. the back-door Roth and mega-backdoor Roth remain), but those are definitely on the chopping block for a future bill. I don’t expect them to survive 2022. Lastly, it means that there won’t be a change to the 2021 State And Local Tax (SALT) deduction, again, for now. Build Back Better will re-emerge in 2022 for certain, perhaps with some provisions that are retroactive to 2021, though with a split Senate and a lack of support from at least two Democratic Senators, it’s a heavy lift to get BBB approved next year as well in it’s current form.

The fact that SALT won’t be changing for 2021 means that for those of you sitting on property tax bills for your residence or vacation home (rentals don’t matter…  property tax is always deductible on rentals) or determining if you should make state estimated tax payments for Q4, you should operate under the assumption that the SALT (State And Local Tax) cap will remain at $10K.  It’s possible that it could be retroactively changed in 2022 for 2021, but at that point, it will be too late to do anything for 2021 anyway.  That means that if both of the following are true:

  1. you already have $10K+ of state income taxes paid (check paystubs + estimated tax payments if you made any to cities/states to confirm) or sales tax paid in the case of a no income tax state (use IRS lookup for that https://www.irs.gov/credits-deductions/individuals/use-the-sales-tax-deduction-calculator) for calendar 2021  + property tax paid for calendar 2021 (check escrow statements if you escrow, otherwise you should know what you’ve paid) AND
  • your 2022 will look similar to 2021 from an income/deductions/SALT standpoint…

… then there is no incentive for you to pay property taxes or state estimated tax payments in 2021 that could be deferred to 2022 (some municipalities allow this…  if yours doesn’t, then the point is moot for you). 

If you don’t already have $10K+ of SALT for 2021, then paying property taxes or state estimated tax payments in 2021 can still be beneficial if you will itemize your deductions on your taxes 2021.  To itemize, for most people, your SALT + mortgage interest + charitable deductions need to exceed the standard deduction ($12,550 single, $18,800 head-of-household, $25,100 married filing jointly).  If you can’t itemize in 2021, then deferring property taxes / state estimated tax payments to 2022 in hopes of being able to itemize then makes sense.

If you know you will not itemize in 2022 but will itemize in 2021, then you could pay property taxes and/or state estimated tax payments in 2021 even if you’re over the SALT limit.  The thinking there is that you wouldn’t be able to deduct those tax payments in 2022 no matter what, so if you pay them in 2021, it sets you up to take advantage of a retroactive SALT deduction increase if such a thing becomes law in 2022.

If you know that you will not itemize in 2021, but will in 2022, then defer property taxes / state estimated tax payments to 2022.

This fun game of “Will I get a tax deduction” is very likely to continue into 2022. We can only hope that the rules for 2021 are finalized in advance of the April 15th, tax deadline for 2021 and maybe, just maybe, the rules for 2022 could be settled before December 2022.

3 thoughts on “Build Back Better Act, Property Taxes & Q4 Estimated Tax Payments

  1. Media outlets suggest the BBB Act will be smaller in size next year. Does this mean High income earners should proceed with a 2022 Back door Roth IRA?

    • No one knows what will happen to BBB next year. All we know is what the House-passed bill looks like, and that the Senate will not be passing that version in 2021. The House-passed version would prohibit after-tax IRA contributions after 12/31/21 and the conversion of existing after-tax dollars in an IRA after 12/31/21. So we know the backdoor Roth is on the chopping block, that is is not yet “chopped”, but don’t know when the effective date of its chopping will be.

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