U.S. taxpayers can deduct their 2018 state and local property taxes on their 2017 returns if they pay those tax bills before the end of the year — and only if the taxes were assessed before 2018, according to the IRS.
The federal authority’s guidance reflects an effort to address some of the confusion triggered by the tax overhaul signed last week by President Donald Trump and the scramble in the high-tax states to avoid some of its provisions.
Homeowners in states with the highest property taxes have been peppering local officials with questions about how to prepay the levies to try to take advantage of a tax break that will be limited next year. They’re being encouraged by state officials, notably in New York and New Jersey, who are trying to facilitate such prepayments.
In New York City, where the property tax fiscal year runs from July 1 through June 30, people can pay property tax bills for the third and fourth quarters before the due dates, according to the city’s Department of Finance. The department is instructing people to consult their tax advisers before making such payments.
The city’s tax roll for the 2018-2019 tax year won’t be completed until May, so property tax bills for July 2018 through December 2018 won’t be determined until June, according to the department.
In the Washington D.C. suburbs, news station WTOP found a line of hundreds snaked through a local government building in Fairfax, Virginia, looking to prepay their 2018 bills. Fairfax County officials, strained by the crowds, are telling people to wire the money instead. In nearby Arlington County, Chief Deputy Treasurer Kim Rucker told local television station Fox 5 that the increased pace of residents looking to cover 2018 tax bills has prompted hundreds of calls during the normally quiet Christmas period, and dozens of prepayments a day.
The tax law, which Trump signed Dec. 22, has prompted some local governments to revise their rules in a bid to facilitate the last-minute change in federal tax strategies. The Montgomery County Council in Maryland broke its winter recess to pass a bill allowing residents to prepay 2018 taxes, The Washington Post reported. But the county doesn’t appear to have completed its 2018 assessments — meaning its residents wouldn’t qualify under the new IRS guidance, the newspaper reported.
In such cases, prepayments may boomerang. State and local laws determine “whether and when a property tax is assessed,” the IRS noted in its guidance late Wednesday — and some localities have not yet assessed 2018 property taxes. Taxpayers should check with their state and local taxing authorities to determine whether the 2018 real property assessments have been done.
The tax-overhaul bill that Trump signed into law last week will limit the deduction that individuals can take for the state and local taxes they pay. As of Jan. 1, the deduction will be capped at $10,000 — a limit that applies to any combination of property taxes and income or sales taxes.
The scramble that has ensued over property tax prepayments reflects congressional Republicans’ rush to pass the tax-overhaul legislation and give their party and Trump a major legislative victory by the end of 2017. It took just a little over seven weeks from the introduction of the first bill in the House to the final passage of joint legislation.
In a related development, some experts have cited confusing language in the law related to state and local income taxes. That section appears to rule out taxpayers’ benefiting by paying 2018 state income taxes before the end of 2017. But it’s preceded by language that might confine that requirement to tax years “beginning after December 31, 2017.”
Victor Thuronyi, a former tax counsel for the International Monetary Fund, wrote in a blog post that the final language might create an opening for people to prepay their 2018 state and local income taxes this year.
“Suppose that someone prepays 2018 tax in 2017, takes a deduction, and the drafting error identified here is not fixed in a technical corrections bill,” he wrote. “If the IRS challenges the deduction and the matter is litigated, how would it turn out? Impossible to say.”
Regardless of such fine points, not every taxpayer would benefit from making the early property tax payments. Those who pay the alternative minimum tax — a kind of parallel tax designed to prevent relatively high earners from reducing their income taxes too much — wouldn’t get the benefit. The best advice: Check with a tax professional.
Sahil Kapur and Terrence Dopp of Bloomberg also contributed to this story.