At the end of the previous post on making the mortgage payment due on January 1 in December, I wrote:
Similarly, if the 2018 property tax bill hasn’t come out yet, prepaying now to just have the local government hang on to the money doesn’t make it deductible in 2017. If the property tax bill has already come out, paying it in 2017 may help …
A reader challenged me on this asking me what my source of analysis was. Now the IRS came out with an official advisory basically confirming this position. If you have a definitive amount of tax to pay, it’s deductible in 2017 if you pay in 2017. If you are just paying ahead against an amount yet unknown, it’s not deductible in 2017.
Example 2: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018. 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.
Please read the entire IRS Advisory for more information: IR-2017-210, Dec. 27, 2017.
Once again, if you are on AMT in 2017 prepaying doesn’t help. It can help if you are not on AMT.
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Peter H. says
It’s more complicated. In NY, Gov Cuomo issued an executive order permitting municipalities to issue warrants for 2018 property taxes. Some municipalities are doing so and representing those warrants as equivalent to assessments, thus in compliance with IRS. I don’t know whether other states have done the same. People need to check with local govt.
Harry Sit says
The IRS said go by the assessment. If local government says the warrants are the same as the assessment then they are consistent.
RDT2 says
What is goofy is many counties in Illinois pay taxes in arrears. So in Cook County, home of Chicago, in February 2018 they will send out a bill for 55% of the 2016 taxes as an estimate for 2017 taxes. Then in July they will send out the final 2017 tax bill due in August 2018.
So it’s a bit grey am I putting down a prepayment or actually paying a bill for 2017 that just hasn’t been billed yet since everything the IRS put out talks about 2018 taxes.
The bulletin does say: 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.
In reading info on the tax assessors website they do say they assess your taxes during the year the tax is for but do not bill you until the following year. So I think this meets the IRS guidelines. But again it’s grey and I am not a tax professional.
RDT2 says
Looks like the Chicago Tribune hasn’t tracked down more info either. Neighboring Lake County assesses in Sept and bills in May.
http://www.chicagotribune.com/suburbs/lake-county-news-sun/news/ct-lns-lake-county-property-taxes-prepayment-1227-20171227-story.html
I might just prepay the amount expected over 10k. The only loss is not having that money on hand for a few extra months if I can’t actually deduct it.
Daniel_K says
Has anyone considered a strategy of overpaying state taxes? I understand the the tax law specifically ruled out prepayment of state taxes. However, I can imagine the possibility of a strategy of a state or local tax overpayment arbitrage. I don’t know if it would work.
For instance, a large part of the 33% tax bracket becomes the 24% tax bracket. That could yield a 9% return on the arbitrage. For example, if a tax payer well into the 33% bracket overpays their 2017 state taxes by $10,000, they will get to deduct that for 2017 on their federal taxes and reduce the federal taxes by $3300. They then get a refund of the $10,000 from the state government when the 2017 taxes are filed. The refund is reported as $10,000 of income in the 2018 federal taxes and taxed at $2400. The net gain to the tax payer and loss to the federal government is $900. If this is a valid strategy, that would be a 9% return. The overlap between the 33% bottom in 2017 and the 24% top in 2018 for joint filers is $233,350 to $315,000. This does not account for the deduction and exemption changes.
Harry Sit says
Check AMT first. It doesn’t work when you are on AMT in 2017. Making a large overpayment for 2017 can also get you on AMT in 2017 when you aren’t on it already.