San Francisco Chronicle
Should you pay your property tax early?
Some California residents could save money by paying the second half of their 2017-18 property tax bill normally due in April, along with any state income taxes they expect to owe for 2017, before the end of the year.
Officials in several Bay Area counties have noticed that more people are prepaying their property taxes as a result of the tax bill Congress passed this week. The Alameda County tax collector is even encouraging residents to consider it. This strategy, however, doesn’t make sense for everyone.
“I’ve got five questions (about prepaying taxes) in the last couple hours,” said Joseph Kovar, a CPA with Sweeney Kovar in Danville. Unfortunately, “there is no one general answer.”
Before paying any taxes early, you should figure out whether you are likely to itemize deductions and whether you will be subject to the alternative minimum tax this year and next — preferably with the help of a tax adviser.
For tax year 2017, people who itemize deductions on their federal return can deduct all state and local taxes including either income or sales tax (whichever is bigger), property taxes, California state disability insurance and motor vehicle license fees.
Under the tax bill, starting in 2018, taxpayers who itemize can deduct a maximum of $10,000 in all state and local taxes combined. However, many taxpayers who itemize deductions in 2017 will no longer do so in 2018 because of this and other changes.
Chief among them: The tax bill roughly doubles the standard deduction to $24,000 for married couples and $12,000 for singles. It preserves the deduction for charitable donations and out-of-pocket medical expenses over a certain amount but does away with miscellaneous itemized deductions.
The bill preserves the mortgage interest deduction for loans made before Dec. 15. On those loans, you can continue to deduct interest on up to $1 million in mortgage debt used to buy or improve one or two homes. For loans made on or after that date, the limit drops to interest on the first $750,000 in mortgage debt.
Under current law, you can deduct interest on up to $100,000 in home-equity loans or lines of credit not used to buy or improve a home. Starting next year, you cannot deduct interest on those loans no matter when they were taken out.
Based on all this, if you expect to itemize deductions in 2017 but not 2018, and are not subject to the alternative minimum tax — often called AMT — it makes sense to prepay your property taxes and 2017 state income taxes.
If you expect to itemize deductions this year and next year, it probably makes sense to prepay state and local income and property taxes this year, assuming you preserve $10,000 in state and local deductions for next year.
If you expect to be covered by the AMT this year, there is no reason to prepay state and local income or property taxes by Dec. 31 because they are not deductible under the AMT. The tax bill modifies the AMT in ways that will make far fewer people subject to it starting in 2018.
It’s possible that some people who are in AMT this year but drop out next year could get some benefit from the state and local tax deduction next year, assuming they itemize deductions in 2018. For them, prepaying this year could backfire.
At the last minute, Congress threw into the tax bill a provision that prevents people from prepaying their 2018 state income taxes this year and deducting them on their 2017 federal returns. This has caused confusion, because it’s still possible to pay any state income tax you expect to owe for 2017 before year end and deduct it on your 2017 federal return.
For example, people who make quarterly estimated state income tax payments are required to make their fourth and final payment for 2017 by Jan. 16, 2018. Suppose you make this payment on Jan. 16. It still counts toward your 2017 California income tax liability, but if — like most people — you are a cash-basis taxpayer, you can’t deduct it on your 2017 federal tax return because you made the payment in 2018.
However, if you make this final estimated tax payment by Dec. 31, you can deduct it on your 2017 federal return as an itemized deduction.
Even if you don’t normally make estimated tax payments, if you expect to owe additional state income tax when you file your 2017 return because you haven’t had enough withheld from your paycheck, you could make an estimated 2017 state income tax payment before the end of the year and deduct it on your 2017 federal return, Kovar said. Again, this assumes you itemize deductions in 2017 and are not subject to AMT.
What you can’t do under the tax bill is prepay any state income tax due for 2018 before Dec. 31 and expect to deduct it on your 2017 federal tax return. If you do, “it will be treated like you paid it in 2018,” said Jeff Levine, chief executive of BluePrint Wealth Alliance.
This last-minute provision does not apply to the prepayment of property taxes for 201718. You can’t prepay the next year’s property taxes — in fact, most county tax collectors say they can’t even accept them.