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 this week that taxpayers can deduct prepaid state and local property taxes for 2018 on 2017 returns only if the taxes were assessed before 2018. The guidance — which doesn’t define the term “assessed” — had local tax officials scratching their heads.
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 at the Urban-Brookings Tax Policy Center, a 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 Gov. Andrew Cuomo and New Jersey Gov. 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 you pay the alternative minimum tax — a federal levy that runs parallel to the income tax and is designed to prevent taxpayers from reducing tax bills too much. The AMT — which affects many with six-figure incomes — can 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 adviser,” 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 payments, 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 advisers.
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.
In New Jersey, where Christie ordered municipalities to accept prepayments of 2018 property tax bills, the IRS guidance doesn’t offer 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,” Kaeding said.
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 the same in Greenwich, where the average home price is almost $1.75 million. But in Stamford, homeowners could be surprised.
The town posted on its website 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 December 31, 2017.”
Stamford said it would “credit” advance payments to future tax bills, but added that it “does not refund any portion of early tax payments.”
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 rates won’t be set until April — meaning residents probably won’t get an enhanced deduction.
“We have never encouraged people to prepay their property taxes,” said Carla de la Pava, Arlington County’s treasurer. The county does accept tax payments head of time, as Virginia law requires, and she 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.
“The county continues to advise taxpayers to consult their own tax adviser about the tax consequences of making a prepayment,” it said.
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.”
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 until September.
In Texas, where counties don’t officially assess property taxes until next October, Dallas residents have besieged the tax assessor’s office with questions. “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.”