Want to prepay your property tax? Not so fast
Not all homeowners are eligible to do so, IRS warns in advisory
The IRS has a warning for the thousands of homeowners in high-tax states who have been rushing to prepay their 2018 property taxes before the new federal tax law takes effect: You may be out of luck.
The sweeping tax overhaul President Trump signed into law last week cut back the itemized tax deductions for state and local property taxes to $10,000. Since the change kicks in Jan. 1, many homeowners have rushed to municipal offices with the aim of prepaying their 2018 property tax levies before the deductions expire.
Officials in some high-tax states took action. New Jersey Gov. Chris Christie signed an executive order Wednesday that required municipalities there to credit the payments. New York Gov. Andrew Cuomo
last week issued a similar executive order that allowed partial payments on
2018 property taxes.
Late Wednesday, the IRS rained on the prepayment parade.
In an advisory posted on the tax agency’s website, the IRS said prepayments of 2018 state and local taxes before Jan. 1 may be tax deductible, but only if the municipalities have assessed the taxes before the year ends.
“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,” the IRS advisory said.
Offering one example, the IRS sketched a scenario in which a county assesses properties on July 1, 2017, for the period from that date until June
30, 2018. The scenario assumed that the taxes were due in two installments, with deadlines of Sept. 30,
2017, and Jan. 31, 2018.
If a taxpayer in that county paid all property taxes due by Dec. 31, the deduction would be allowed, the IRS said.
The tax agency also sketched a second scenario, this time of a county that intends to make a property tax assessment in July 2018 for the period from July 1, 2018, until June 30, 2019. The scenario also assumed that the county programmed its computers to accept prepayment of those taxes this year.
Homeowners would not be allowed to deduct the prepayments because the county did not plan to assess the taxes until July 2018, the IRS said.
“Estimating your property tax liability isn’t enough. The property tax must be billed, too,” Nicole Kaeding, an economist with the Center for State Tax Policy at the Tax Foundation, wrote in a Wednesday blog post. The foundation is an independent think tank that at times has projected high growth from tax cuts.
However, the new federal tax change raises the standard deduction for individuals and couples, mitigating the impact of the lower deduction for state and property taxes.
Cuomo’s executive order appeared to anticipate the tax assessment issue. It authorized localities to issue warrants for the collection of early property tax payments and accept partial payment. The warrants are legal actions and public records stating that property owners owe taxes to New York State, according to an advisory by the state’s Department of Taxation and Finance.
Homeowners in Harrison, N.Y., lined up 10 deep Wednesday afternoon in Town Hall. “It seems straightforward,” homeowner Barrie Hedge said. “I’ll pay more this year but will be better off next year when my deductions are cut.”
As of noon Wednesday, more than
1,000 property owners had paid early, said Mike Giordano, Harrison’s newly elected receiver of taxes. “There’s a lot of money coming in,” he said.
Harrison town officials also let property owners know they could prepay the second half of their school taxes, which in many New York jurisdictions are due Jan. 31.
However, not all U.S. localities allow homeowners to prepay taxes that haven’t yet been levied. In California and Wisconsin, homeowners can’t prepay tax bills that won’t show up until December 2018. But they may pay 2017 taxes now that generally would be due in 2018.
Before the IRS issued its advisory, taxpayers in some other states crowded into municipal tax offices with hopes of reducing the expected property tax bite.
“By prepaying, we will save roughly
$4,000 next year,” Julia Colby of Alexandria, Va., said Wednesday as a long line snaked back from the payment counter of Fairfax County’s Department of Tax Administration. “My husband did a little quick math this morning, and he said, ‘Yes, it’s worth it. Go do it.’ ”
Because Fairfax County’s property tax assessments for 2018 have not begun, those taxpayers appear not to be able to deduct what they paid in advance, according to the IRS guidance.