Over the Christmas-to-New-Years week, a steady question was being asked all over Texas, thanks to the new tax bill signed by President Donald Trump last month — “Can I pay my 2018 property taxes early to take advantage of one last deduction?”
The answer is well, yes and no. The Internal Revenue Service released an advisory last week to try to tamp down the rumors (we shared it on our Facebook page to give everyone the heads up).
The IRS advisory said that pre-paying the 2018 state and local property taxes in 2017 could be deductible – but only under certain scenarios.
Basically, the key words are anticipated or assessed. If your appraisal district has not yet assessed your 2018 taxes and only can provide an estimate, then you’re kind of out of luck. But if you have been assessed taxes for 2018, you could indeed pre-pay and take advantage of the deduction.
“In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018,” the IRS says. “A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.”
“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.”
The agency also provided a couple of examples of what it is talking about.
“Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017 – June 30, 2018,” the IRS said. “On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018.”
“Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.”
The agency also provided an example of when pre-paying could not be deducted. “County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018,” the advisory said. “County B intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year.”
“Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.”
But the better question probably should’ve been, “Do I WANT to pre-pay and deduct now?”
For instance, if you consistently have paid less than $10,000 in property taxes each year, you still fall under the cap and will more than likely be able to continue to deduct your property tax payments. In that case, it makes no sense to pre-pay.
It also makes little to no sense to pre-pay if you fall under the Alternative Minimum Tax — or if pre-paying your 2018 taxes would make you fall under the AMT for this year.
The best idea, of course, is to talk to a tax professional — especially if you went ahead a pre-paid in hopes of squeezing out one more deduction before you do your 2018 taxes in a year.
Coming up, I’ll take a look at what these changes could mean for school districts mulling over Tax Ratification Elections.
Bethany Erickson is the education, consumer affairs, and public policy columnist for CandysDirt.com. Contact her at firstname.lastname@example.org.