IRS GUIDANCE: Paying early seems like it’s not paying off for your property taxes

Gray Lyman had nearly left for the Harris County tax office to prepay next year’s property taxes when he realized that his attempt to save money might be worthless after all.

He spent much of Thursday on the phone, trying to contact his tax consultant to determine whether paying them this year would allow him to take a soon-to-expire deduction on his 2018 federal tax return.

Tax experts generally had agreed the maneuver might have merit for certain homeowners facing a tax hike after Congress scaled back the popular break as part of its tax code overhaul this month.

Then new federal guidance, issued by the Internal Revenue Service late Wednesday, suggested otherwise.

“It’s confusing,” Lyman said. “No one really knows, or someone knows something that’s incorrect.”

Lyman and hundreds of other Houstonians who rushed to estimate their 2018 property taxes by year’s end learned Thursday that their hefty, unplanned payments could not be used to reduce their next income tax bill because their properties have not been formally assessed. Across Texas, assessments are based on Jan. 1 property values.

Thus, the 2018 property

taxes will be still be subject to the new federal rules that cap state and local tax deductions at $10,000 — a threshold exceed by perhaps one in four Houston homeowners.

“Unfortunately, it looks like the IRS canceled the run on property tax prepayments for next year in Texas,” state Sen. Paul Bettencourt, R-Houston, said in a statement Thursday.

Bettencourt, a former Harris County tax assessor-collector, said the IRS guidelines “clearly indicate that Texans would not receive a deduction for prepayment” because homeowners won’t be billed until after Jan. 1.

The guidelines highlighted the lack of clarity surrounding the hastily negotiated tax plan, which has sent tax accountants and lawyers scrambling to learn its particulars before it takes effect next month. Among other things, the legislation slashes the corporate tax rate, lowers individual rates and lessens the tax burden for small businesses.

But it also limits mortgage and property tax deductions that homeowners have taken advantage of for generations.

The rollback of the longstanding state and local tax deduction is expected to affect millions of homeowners across the country, particularly those in states with relatively high property taxes. That includes Texas, which has no state income tax and relies more heavily on property assessments.

It’s estimated that as many as a quarter of Houston homeowners could pay property taxes above the $10,000 threshold.

Sylvie Novotny, vice president of Houston property tax firm Novotny & Co., said that anyone with a home valued at $300,000 or more is likely affected by the changes.

In Harris County, the tax assessor’s office has seen an uptick in the number of people rushing to pay before the end of the year, spokesman Mike Lykes said. The office has for years accepted prepayments and Lykes could not offer an estimate of how many people had chosen to pay early this year.

He added, however, that the office has received a flood of calls from homeowners seeking clarification on whether prepayments are eligible for the deduction.

“It has made this week a very busy week,” he said.

Novotny said her office had fielded a number of questions from clients asking whether they should cut two separate property tax checks this year. She contacted the Harris County assessor’s office after the IRS guidelines came out, seeking a final answer

on the prepayment deduction question.

“Most people aren’t usually interested in pre-paying,” she said.

Lyman, who bought his century-old home near the Museum District for $115,000 in 1979, has watched his property value escalate each year. He’s not sure how much more he’ll pay in taxes next year, but he said he now pays well more than the $10,000 cap.

While he said he expects the overhaul to benefit individuals

across the economic spectrum, he’s frustrated at the last-minute nature of the changes. Hours after the IRS released its guidelines, for example, he received a mass email from his Texas property tax adviser recommending that homeowners “pay as much property tax as practical” before the end of the year to receive a greater deduction.

“It’s a mess,” he said.