Is it possible to prepay taxes, as President Trump claims he did?
President Donald Trump and former Vice President Joe Biden tangled over taxes during the Thursday presidential debate, with Trump stating he prepaid taxes in the amount of “tens of millions of dollars” after Biden criticized him for failing to release his tax returns.
“I prepaid, because at some point, they think it’s an estimate. They think I may have to pay tax,” Trump said during the debate.
That’s sparking curiosity about whether it’s possible to pay the IRS upfront.
In a word, yes, says tax expert Harvey I. Bezozi, who is a CPA and CFP in Boca Raton, Florida.
While Trump didn’t clarify how he prepaid his taxes, he could have relied on a few techniques, Bezozi says.
The U.S. requires workers to pay taxes as they earn their income — such as when companies withhold taxes from your biweekly paycheck. In one sense, workers can "prepay" their taxes if they withhold bigger amounts from their paychecks — a strategy that some people tap because it results in a juicier refund at tax time.
"It’s a forced savings plan," Bezozi says. That "could very well be described as ‘prepaying their taxes.’”
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Pre-pay taxes quarterly
However, it’s likely that Mr. Trump is referring to another set of strategies, given his status as a business owner with wide-ranging real estate investments.
First, self-employed workers, a group that can include anyone from freelancers to business owners, can "pre-pay" their taxes through their quarterly estimated tax installments. These payments — which are typically due on April 15, June 15, September 15 and January 15 — are based on a self-employed worker’s estimated earnings throughout the year.
But because it can be difficult to accurately pinpoint annual income, some self-employed workers overestimate their quarterly payments to make sure they don’t owe (or get socked with an underpayment penalty from the IRS) at tax time.
'Huge amounts of depreciation'
However, Bezozi says, Trump could be referring to another strategy that’s used by real estate developers. The tax code allows qualified real estate professionals — like Trump — to deduct "huge amounts of depreciation," he says.
"With a guy like Trump, involved in real estate, he could have millions of write-offs," Bezozi says. "It's not atypical for someone like that."
That helps real estate professionals because they can deduct the costs of buying and improving rental properties from their taxes, a helpful strategy for offsetting taxes on other business income and creating a net operating loss. Tax losses can roll forward into subsequent tax years, lowering taxes for years to come.
“Taxes that were paid in then become overpayments, which are subsequently carried forward for several years as tax overpayments,” Bezozi adds.
That’s not a strategy that regular homeowners can use, he notes. The tax code helps real estate professionals due to the huge amount of risk they assume when buying condominiums, hotels, and other properties.
Says Bezozi: "In this country, to take certain risks, you are given certain benefits."
This article originally appeared on USA TODAY: Can you prepay taxes? Trump claims he did but can pay the IRS upfront?
