The repeal of the deduction for state and local income taxes would be effective for tax years beginning in 2018. This raises the question of whether individual taxpayers should consider prepaying part, or even all, of their predicted 2018 state income tax liability in 2017 so as to get a federal deduction for the payment. It would be one thing to prepay in 2017 a state estimated income tax payment that is due on April 15, 2018, but could this be pushed farther? Could a taxpayer prepay his or her entire predicted 2018 state income tax liability in 2017 and get a deduction for it in 2017? Could the IRS challenge such a position based on a general argument that it would distort the taxpayer’s liability? The IRS has not addressed this issue in published guidance, but rulings suggest that a cash-basis taxpayer can deduct state income taxes when paid if the payments are based on a reasonable estimate of tax liability (Rev. Rul. 71-190, 1971-1 C.B. 70; Rev. Rul. 82-208, 1982-2 C.B. 58). Section 461 of the Internal Revenue Code, which generally addresses the timing of deductions, would not seem to apply to this situation. Of course, prepaying state or local income taxes could be done only if it were permitted by the laws of the applicable jurisdiction.
The key to that rev ruling is the tax year. A reasonable estimate of 2017 taxes would not include a payment against taxes billed and due in 2018. Only taxes due in 2017.
A second issue is accounting methods. Prepaying a tax when you did not prepay the tax in prior years is an accounting change. Such a change requires advance approval.