WITH LOWER TAX rates in the offing, many of my clients tell me they’ve heard it pays for them to accelerate deductions for 2018 into 2017. How, they ask, does that tactic benefit them?
They beam when I alert them to two breaks. First, they qualify for deductions one year sooner. Second, they lose less to the IRS when they apply their deductions against higher-taxed 2017 income, instead of lower-taxed 2018 income.
I decide to prolong our chat and caution them not to take their eyes off the calendar when they write checks at year’s end. Their efforts to offset write-offs against 2017’s income, rather than 2018’s, could be thwarted by longstanding IRS rules.
I’ve long ceased being surprised by how many clients, scrambling for last-minute write-offs, mistakenly believe that just writing “Dec. 31” on checks automatically entitles them to claim 2017 deductions for business expenses, charitable contributions, medical bills, interest expenses, state and local taxes, and the like. Wrong.
What does an adamant IRS insist taxpayers do? They must put their payments in mailboxes in sufficient time for letters to be postmarked by midnight Dec. 31. I assure clients that as long as they do that, the agency couldn’t care less that their checks reach recipients in 2018.
The IRS also remains unconcerned when taxpayers use credit cards issued by third parties like American Express and Visa. It concedes that taxpayers qualify for deductions as soon as they authorize charges, even if AmEx doesn’t bill them until 2018. But they might be unable to shift write-offs from 2018 to 2017 when they pay with credit cards issued by stores who bill them directly. No deductions, warns the IRS, until they pay the bills.
Another no-no: The IRS deep-sixes deductions for 2017 if taxpayers mail checks that are postdated to prevent cashing until 2018. The IRS and the courts agree that it makes no difference that taxpayers mailed them by Dec. 31.
Consider the Tax Court’s homily in a decision that held the IRS correctly disallowed a deduction for the year of mailing: “A postdated check is not a check immediately payable but is a promise to pay on the date shown. It is not a promise to pay presently and it does not mature until the day of its date, after which it is payable on demand the same as if it had not been issued until that date, although it is, as in the case of a promissory note, a negotiable instrument from the time issued.” Put more plainly, fuhgeddaboudit.
As a parting reminder, I also alert my clients to what’s likely to happen if IRS computers bounce their returns for examination. They should expect IRS auditors to look closely at large year-end checks that are dated Dec. 31 and are made out to charities, doctors, tax collectors and others. And why shouldn’t the auditors contend that the payments ought to be deducted on 2018’s 1040 form, rather than 2017’s, especially when the recipients may not have sent the checks to their banks until well beyond 2017’s close?
My clients ask for guidance on what they might do beforehand to placate the IRS. I advise them to use certified mail to send their payments, request certified mail receipts, and staple the receipts to their canceled checks.
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include A Year for Generosity and This Year or Next? This article is excerpted from Julian Block’s Year-Round Tax Savings, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.