Prepaying estimated state and local income tax has been a savvy maneuver. If such taxes are due in January 2004, for example, they can be paid in December 2003 so those payments can be deducted on your federal tax return for 2003. Prepaying tax by one month accelerates the tax deduction by a year.
However, you have to be careful about such prepayments. If you owe the alternative minimum tax (AMT), such payments will be added back to your income and you’ll get no benefit. You might waste a payment of thousands of dollars.
Taxpayers living in high-tax states and cities are the most likely to have AMT concerns. Your tax pro might be able to bring you to the cross-over point. That is, you might be advised to make a partial prepayment of state and local estimated tax this year, reducing your 2003 taxable income to the lowest possible amount before you’d be subject to the AMT.
