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Friday, December 22, 2017

The New Tax Law is Official! Should You Prepay Your 2018 Property Taxes By Year-End?


As a homeowner in a high-tax state (New Jersey), I took a very personal interest in this topic. A question from a colleague last week led to hours of pouring through articles about the nuances of the newly minted Tax Cuts and Jobs Act. Here is my colleague’s question and my answer:

Question: Can I prepay 2018 property taxes (e.g., for a house in NJ with $15,000 of property taxes) by December 29, 2017 (the last business day of the year) to avoid the loss of a full property tax deduction next year with the new $10,000 cap on deductible state and local taxes (SALT deductions)?

Answer: It depends. If you pay your property taxes directly to your local municipality, check with the tax collector to determine if property tax prepayment is allowed and, if so, how much money or quarterly payments can be accepted for prepayment. If your property taxes are paid via an escrow account that is held by a mortgage lender, they are not considered payable by the IRS until the lender (or lender’s loan servicer) makes a payment to your local tax collector, regardless of when you send the lender a payment.

If you are eligible to itemize deductions, property taxes are claimed as an itemized deduction on Form 1040, Schedule A. If you are subject to the alternative minimum tax (AMT), prepaying property taxes won’t help because state and local taxes are not deductible under AMT rules.

Below is a graphic that I created with five decision-making questions. If you can answer the questions as indicated, 2018 property tax prepayment may be useful.




4 comments:

  1. If you have an escrow account, it may be possible to prepay some 2018 property tax directly to your municipality and then get the escrow account adjusted later to reflect that payment. You will need to check with your municipality and mortgage loan servicer to find out if this can be done.

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  2. Concerns have been raised as to whether the property tax prepayment strategy itself will pass IRS muster. The consensus seems to be to only prepay what you know you owe and have payment coupons for to be on the safe side (i.e., quarterly payments that your town has already billed). That is what I did personally. Until this issue is entirely clarified by the IRS, consider prepaying NOW, before it is too late (after close of business Friday, 12/29), to preserve the option. Assuming that people have the cash, are allowed to prepay by their municipality, can pay money directly to the municipality, and don't pay the AMT, they should consider pre-paying. If this strategy is ultimately disallowed by the IRS, they will not have really lost anything.

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  3. Clarification from the IRS today as to when property tax prepayments are deductible: https://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017. As I noted above, a prepayment of anticipated real property taxes that have not yet been assessed prior to 2018 is not deductible in 2017. The IRS press release has some good examples.

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  4. It would NOT make sense to prepay property tax if: you don't have the money readily available, can't pay taxes directly (e.g., your escrow payment servicer won't adjust your escrow account for a direct prepayment to your municipality), your municipality won't accept prepayments, you expect to pay the alternative minimum tax (AMT) in 2017, and/or you don't expect to be able to itemize tax deductions in 2017. Also, as per IRS guidance, you cannot take a tax deduction for prepaid 2018 property taxes that were not formally assessed in 2017: https://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017.

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