New guidance from the Internal Revenue Service that limits taxpayers’ ability to deduct prepaid property levies on their 2017 tax returns is causing confusion nationwide as people rush to pay in advance without knowing whether they’re wasting their time and money.
The IRS said Wednesday that taxpayers can deduct prepaid state and local property taxes for 2018 on 2017 returns only if the taxes were assessed before 2018. The brief guidance -- which doesn’t define the term “assessed” -- had local tax officials scratching their heads. (For more, see "IRS warns property tax prepayments must be properly assessed.")
Some see the issue as an early signal of far wider confusion that’s coming soon -- the predictable result of passing a bill that rewrites the Tax Code just two weeks before many of the changes take hold.
“This is the tip of the iceberg as state and local governments try to figure this out -- and by the way, they’re trying to figure it out with one week before the changes take effect,” said Richard Auxier, a researcher with the Urban-Brookings Tax Policy Center, a Washington public policy group. “And that week happens to be the week between Christmas and New Year’s.”
The IRS guidance comes after many state and local officials -- including New York Governor Andrew Cuomo and New Jersey Governor Chris Christie -- have taken pains to clear the way for their residents to accelerate property-tax payments. The nationwide flurry came ahead of the new tax law that will cap property tax deductions -- along with those for state and local income taxes or sales taxes -- at an overall total of $10,000.
For people in high-tax states, that spurred a rush to try to prepay for 2018 -- or even beyond -- to use the deduction on this year’s taxes, before the cap. But in practical terms, the new IRS guidance creates a patchwork of answers about whether the strategy makes sense: It depends on where you live.
It also depends on whether the taxpayer is subject to the Alternative Minimum Tax -- a federal levy that runs parallel to the income tax and is designed to prevent taxpayers from reducing their tax bills too much. The AMT -- which affects many people with six-figure incomes -- can actually be triggered by a large increase in itemized deductions, and it can render those deductions useless in terms of cutting taxes.
“That’s why it’s so important for people to talk to their tax advisor,” said Nicole Kaeding, an economist with the Center for State Tax Policy at the Washington-based Tax Foundation. Beyond that, she noted that local governments across the country can have widely different schedules for issuing property tax bills.
“In many local areas, property taxes do cross calendar years,” she said. So in deciding whether to make advanced property-tax payments, taxpayers need to tread carefully.
In New York City, where the property tax fiscal year runs from July 1 through June 30, people can pay their tax bills for the third and fourth quarters -- that is, through next June -- ahead of time, according to the city’s Department of Finance. The department is instructing people to consult their tax advisors before making such payments.
The city’s tax roll for the 2018-2019 tax year won’t be completed until May -- so property tax bills for July 2018 through December 2018 won’t be determined until June, according to the department.
New Jersey Law
In New Jersey, where Christie this week ordered municipalities to accept prepayments of 2018 property tax bills, the IRS guidance doesn’t offer total clarity. It says: “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.”
By state law, a New Jersey property assessor “shall determine his taxable valuations of real property as of October 1 in each year” -- language that sounds promising for would-be tax cutters. But the same statute holds that the assessor “shall complete the preparation of his assessment list by January 10.” Ultimately, the “final assessment” is to be completed by May 5.
The IRS guidance suggests that what’s important is when “you’re being billed for the property taxes,” said Kaeding of the Tax Foundation.
That might not be good news for prepayers in New Jersey. A spokeswoman for the New Jersey Department of Community Affairs didn’t respond to requests for comment. Nor did a spokesman for Christie’s office.
Towns on Connecticut’s “Gold Coast” of hedge fund managers and Wall Street executives have also rushed to tell residents what they can and can’t pay. But in many instances, confusion reigns.
Some Connecticut towns collect property taxes in advance; others in arrears. In New Canaan, a recorded message on the town tax collector’s office line says, “You can pay the second half of the July 2017 taxes in December 2017, which would normally be paid in January” 2018. It adds that “we do not have a warrant to collect the taxes for July 2018, and therefore it becomes illegal to accept any additional funds.”
The message is largely the same in Greenwich, where the average home price is almost $1.75 million. But in Stamford, some homeowners could be in for a surprise.
The town posted on its Web site on Dec. 21 that it “will accept early payments for property taxes,” but added that city officials won’t “provide any assurance or opinion that the IRS will allow these payments to be deductible on federal income taxes for the calendar year ending on Dec. 31, 2017.”
Stamford said it would “credit” advance property tax payments to future tax bills, but added that it “does not refund any portion of early tax payments.”
‘Not an Accountant’
Taxpayers in Washington, D.C., may have a clearer path. The city’s Office of Tax and Revenue reviewed the IRS guidance and determined that “taxpayers prepaying their 2018 tax bills in 2017 can deduct the tax payments on their tax return,” according to a statement released by the city.
That’s because the city assessed property taxes for the 2018 fiscal year on Oct. 1.
But in nearby Arlington County, Va., 2018 property tax rates won’t be set until April -- meaning residents probably won’t get the enhanced deduction.
“We have never encouraged people to prepay their property taxes,” said Carla de la Pava, Arlington County’s treasurer. “I am not an accountant and I don’t play one on TV.”
The county does accept tax payments head of time, as Virginia law requires -- and de la Pava said that since Dec. 1, it has collected $11 million in prepayments, far more than usual.
In Montgomery County, Md., where the county council broke its December recess on the day after Christmas to meet and adopt a local law allowing prepayment, the effort appears to have been a waste of time. The county’s assessments for 2018 will be made in July, according to a statement released by the county government Thursday.
“The county continues to advise taxpayers to consult their own tax advisor about the tax consequences of making a prepayment,” the statement said.
Refunds Come Later
It’s not clear how many people in Montgomery County tried to take advantage of the prepayment -- but it is clear that they’ll have to wait for any refunds. The county’s statement says, “There can be no refunds until there is a 2018 tax bill for your account” -- and then only if the prepaid amount exceeds the amount on the tax bill.
In California, local tax officials in Los Angeles and San Francisco are telling residents that they cannot prepay their 2018-2019 property taxes this month -- the bills against which those prepayments would be credited won’t even be generated and mailed until next September.
However, because 2017-2018 property taxes are billed in two installments -- with the second not due until 2018 -- property owners can pay the second installment this month to seek a larger tax break, according to notices posted online by local tax officials.
In Texas, where counties don’t official assess property taxes until next October, Dallas residents have besieged the tax assessor’s office with questions. The news probably isn’t good, but local officials are making clear that they’re not tax advisers.
“We are being careful not to advise people about the possible benefits,” said Dallas County Deputy Chief Tax Assessor Paul Hamilton. “We don’t know what it means.”
--With assistance from John Voskuhl