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.

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