Thousands of homeowners are rushing this week to prepay their property taxes before the new tax legislation takes effect in 2018. The GOP bill caps the amount of state and local taxes that can be deducted from federal income tax liability at $10,000.
But many residents trying to avoid that deduction limit on their state and local taxes will be disappointed: the IRS on Wednesday announced that taxpayers can prepay their 2018 property taxes only if they have already received a tax assessment from their local government and they make payment by the end of the year.
The new tax plan passed by the GOP brings sweeping changes to state and local tax deductions, including the property tax. Under the old system, a homeowner could deduct all these taxes from their federal income tax liability. This move effectively transferred funds from the federal government to the states and saved homeowners $35 billion in 2016, according to the Tax Policy Center. In 2018, the deduction is capped at $10,000.
But what if you prepay your 2018 tax bill in 2017, when the deduction still exists? According to the new IRS guidance, “pre-paying 2018 state and local property taxes in 2017 may be tax deductible under certain circumstances.”
Can I prepay local income taxes?
For state and local income taxes, the bill prevents it.
“…an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, shall be treated as paid on the last day of the taxable year for which such tax is so imposed.”
What about property taxes?
While the bill makes prepayments for income tax count only in the year the tax is imposed, it doesn’t say anything about property taxes, so prepaying is being considered fair game. But the IRS followed up on the recently passed law with guidance of its own: “A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.”
Judging by how the law was written — with it explicitly saying “income tax” and not property tax — prepayment is being considered legit by many localities. So if you prepay your real estate taxes for 2018 in 2017, the payment can be used as an itemized deduction on your 2017 tax return under the old system, potentially saving homeowners — especially those in high-tax states — quite a bit of money.
However, the IRS may still issue more rulemaking to fill in the details, which could be important. One example that could affect people, one accountant told Yahoo Finance, is that the IRS may only allow this prepayment for people who already have a property tax bill. (Wednesday’s guidance makes this clear that taxes assessed in 2018 can’t be deducted in 2017.)
Should I prepay?
The accountants Yahoo Finance spoke with noted that it depends on your financial and tax situation, and it’s good to run the numbers. Vincent Cervone, an accountant in Brooklyn, N.Y., said if you make enough money to qualify for the Alternative Minimum Tax (AMT), prepaying property taxes won’t save you money. This is because if you’re subject to the AMT, you are not allowed to deduct state and local taxes, so prepaying may not reduce your federal income tax bill. The bottom line is: Talk to your accountant.
“I’m telling my clients, look at your tax return for last year, and if you paid AMT last year, it means you’ll pay this year and prepaying property tax won’t help,” he told Yahoo Finance. “If you didn’t pay AMT and have property taxes of $10,000 [or more], I recommend you prepay. You’ll get a discount.”
How do I know if my county or town allows prepayment?
Unfortunately, not all towns or cities are allowing homeowners to make these payments. But more importantly, if your 2018 property taxes haven’t been assessed yet, you can’t deduct them on your 2017 tax returns.
Many towns across the country have issued statements as to whether they’re accepting early payments for property taxes, and New York Gov. Andrew Cuomo went so far as to sign an executive order authorizing localities to accept early payments, Barry Kleiman, a CPA with Untracht Early, said. (Cervone, however, noted that you could already do this if the municipality allowed it.)
Some towns and cities have placed robocalls to residents this week offering guidance on prepayment. Others have issued releases on town websites instructing homeowners on whether they can prepay property taxes, how to pay, and how much.
But many municipalities have not issued 2018 assessments yet, and it’s unlikely they will with so few days left in the year. So the new IRS ruling may sow even more confusion for taxpayers who paid their 2018 property taxes but didn’t get an assessment from local officials.
When is the deadline to prepay?
All payments must be made in tax year 2017, but the precise deadlines vary by town. Some tax collector’s offices, like in Montclair, N.J., may have extended hours and could be open as late as Saturday, Dec. 30, allowing residents extra time to prepay if they want to. The last weekday in 2017, however, is Dec. 29.
Can I mail a check?
This varies as well. Some towns like Millburn, N.J., require residents to drop off payments in person or in a drop box during regular business hours, and will reject and mail back after-hours payments. Check with your local office.