Is There a December Effect? Strategic Prepayments of Deductible State Income Tax

Posted: 4 May 2010

See all articles by John Shon

John Shon

Fordham University

Stan Veliotis

Fordham University - Gabelli School of Business

Date Written: March 1, 2010

Abstract

Individuals’ state income tax payments are deductible in the year paid for federal income tax purposes. This study investigates whether, and to what extent, individuals implement federal tax planning by prepaying state estimated income taxes before year-end, even though those payments are not due until January 15. Based on a study of 34 states’ aggregate data on estimated income tax receipts from individuals, we find strong evidence of this effect. We also find that this effect is increasing with the cost of state income tax payments. The results suggest that individual taxpayers take steps to reduce taxes by shifting deductions from one year to an earlier year and/or exploit the time value of money provided by accelerating federal tax savings by one year.

Keywords: tax planning, state income tax, marginal tax rate, time value of money

Suggested Citation

Shon, John and Veliotis, Stanley, Is There a December Effect? Strategic Prepayments of Deductible State Income Tax (March 1, 2010). Journal of the American Taxation Association, Vol. 32, No. 2, 2010. Available at SSRN: https://ssrn.com/abstract=1599288

John Shon

Fordham University ( email )

113 West 60th Street
New York, NY 10019
United States

Stanley Veliotis (Contact Author)

Fordham University - Gabelli School of Business ( email )

441 E Fordham rd
Bronx, NY 10458
United States

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