As taxpayers across the nation race to pay their property taxes early, assuming they’re getting one last shot at a federal deduction set to be scaled back under the new tax rules, confusion has set in over who exactly will benefit from this early-bird strategy.
Causing even more head-scratching, the Internal Revenue Service weighed in on the matter late Wednesday, announcing that these early payments will be deductible only in certain situations. This sent off flares in East Coast states where folks were doing some things the IRS didn’t like; The Washington Post reported that the IRS ruling could invalidate many taxpayers’ prepayments and put pressure on local governments to refund millions of dollars collected from misguided taxpayers.
But if you’re a taxpayer in the Golden State, don’t panic. Our best guess is that Californians who are planning to pay — or already have paid — the tax bill sitting on their desk will get their deductions. With the help of reports in the Post, The Hill and other news outlets, and input from Santa Clara County assessor Larry Stone, here’s what you should know.
What’s this all about?
In one of the more controversial elements of the tax law, there’ll be a new $10,000 annual cap on deductions for state and local taxes. The rule will disproportionately affect higher-tax and traditionally Democratic states like California and New Jersey, and the limit on property-tax deductions will hurt millions of homeowners in pricey housing markets like the San Francisco Bay Area.
How are people reacting?
In states like New York and California, with high property values resulting in high property taxes, tax collectors have been bombarded by people trying to pay their property taxes early to get a deduction in 2017 that they may not get in 2018.
What did the IRS say about it?
The IRS on Wednesday cautioned taxpayers that prepayment of state or local real property taxes may not be deductible if those property taxes haven’t been assessed yet.
“A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017,” the statement says.
So what does that mean for taxpayers?
There are two different things happening here. Let’s look at California first.
As Stone notes, property assessments are done each year based on values as of Jan. 1.
“My office closes the assessment roll for Santa Clara County on July 1. And just like every other county in the state, the tax is 1 percent of the assessed value. The bills go out in October and you can pay it in two installments.”
The first is due Nov. 1 and delinquent on Dec. 10, and the second installment is due on Feb. 1 and delinquent on April 10.
In normal circumstances, most of us delay paying that second installment until close to the April deadline for delinquent payments. But this year, faced with changing tax laws, a lot of us — on the advice of our accountants and listening to local assessors like Stone — are paying the second installment in December.
According to the Washington Post, in some East Coast states, taxpayers have been even more aggressive. Rather than simply paying their 2017-2018 taxes before they’re due, they’ve been obtaining estimates of their 2018-2019 taxes and paying those as well. This has been encouraged by accountants and some government officials. Now, the IRS is saying “no dice.”