The New Jersey Society of CPAs is warning taxpayers in the Garden State that the New Jersey Division of Taxation isn’t letting them deduct the 2018 property taxes they prepaid last year on their 2017 state return after passage of the Tax Cuts and Jobs Act, though the move could still be helpful in terms of federal taxes.

The New Jersey Division of Taxation has decided that taxpayers who opted to prepay some of their 2018 property taxes in 2017 will only receive that deduction on their 2018 state tax return, but they will be able to receive the deduction on their federal return for tax year 2017.

"Residents can claim a deduction or credit on their New Jersey income tax returns for the property taxes they have paid,” the Division of Taxation said. “However, they can take the deduction or credit only in the year in which the property taxes were due. Taxpayers cannot take deductions or credits for 2018 property tax prepayments on their 2017 New Jersey income tax returns (NJ-1040). They must wait until they file their 2018 returns.”

The Tax Cuts and Jobs Act that President Trump signed into law late last month imposed a $10,000 cap on state and local tax deductions starting with 2018 federal tax returns. That prompted many homeowners in the Garden to rush to prepay a portion of their 2018 property taxes before the end of the year. However, the tax advantages of prepayment don't apply to New Jersey tax returns, although they could be a help with federal returns.

“Homeowners may be in for shock when they discover that their end-of-year planning to increase their 2017 federal property tax deduction will have no impact on their 2017 New Jersey income tax return,” said Ralph Albert Thomas, CEO and executive director, New Jersey Society of CPAs in a statement. “What may further frustrate Garden State residents is that since 1996, there has been a $10,000 cap on property tax deductions on New Jersey tax returns.”

NJCPA CEO and executive director Ralph Albert Thomas
NJCPA CEO and executive director Ralph Albert Thomas

The NJCPA provided a couple of examples to clarify when Garden State residents can take property tax deductions by year:

Example A

Homeowner A's property taxes are $8,000 per year. He paid all of his 2017 property taxes ($8,000) during 2017 and also prepaid the first two quarters of his assessed 2018 property taxes ($4,000) on December 27, 2017.

• On his 2017 federal tax return, he can claim a property tax deduction of $12,000 - the total of all property tax payments assessed and paid in 2017.

• On his 2017 New Jersey tax return, he can only claim a property tax deduction of $8,000 - the total of all property taxes assessed in 2017. The $4,000 prepayment of his 2018 property taxes will be deductible on his 2018 New Jersey tax return, even though the payment was made in 2017.

Example B

Homeowner B's property taxes are $12,000 per year. She paid all of her 2017 property taxes ($12,000) during 2017 and also prepaid the first two quarters of her assessed 2018 property taxes ($6,000) on December 27, 2017.

• On her 2017 federal tax return, she can claim a property tax deduction of $18,000 - the total of all property tax payments assessed and paid in 2017.

• On her 2017 New Jersey tax return, she can only claim a property tax deduction of $10,000 - the total of all property taxes assessed in 2017, with a cap of $10,000 per year. The $6,000 prepayment of her 2018 property taxes will be deductible on her 2018 New Jersey tax return, even though the payment was made in 2017.

NJCPA members recommend that taxpayers who have opted to prepay their taxes and take the deductions should also retain their canceled checks as proof of payment for 2017 and 2018. They cautioned that extra scrutiny could be placed on those returns due to the prepayment allowances. The NJCPA encourages residents to consider their individual financial situation and obtain guidance from a CPA.

Late last year, the IRS issued guidance saying that prepaid property taxes will only be deductible for 2017 if they have been assessed by the local jurisdiction (see IRS warns property tax prepayments must be properly assessed). “A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017,” the IRS warned. “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.”

Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.