Before the new tax law takes effect, you can prepay your 2018 property tax bill. But the IRS will only allow the deduction in 2017 under certain circumstances.
- Republicans' new tax law takes effect on Monday.
- Ahead of the changes, taxpayers can make end-of-year tax moves such as prepaying their property taxes for next year.
- The IRS has guidance to help taxpayers determine whether they will be able to deduct a prepayment of their 2018 property tax bill.
Congress has passed the massive Republican tax bill, and President Donald Trump signed it into law before Christmas.
For taxpayers who itemize their deductions, that could mean an increased tax bill in 2018. But there are some things you can do now to prepare for the changes, including maximizing your 2017 tax deductions.
Many taxpayers are rushing to pay one particular deduction before the end of the year: their 2018 property tax bill. Under current tax law, you can deduct taxes paid to state and local governments, including property, income, and sales taxes. But the new law caps the deduction at $10,000, either for property taxes, state and local income taxes, or sales tax.
Homeowners whose property taxes are more than $10,000 — and not subject to the alternative minimum tax — could save money by paying next year's property tax bill by Sunday, the day before the new law takes effect, if their local government takes it.
But the IRS has said that 2018 property taxes paid in 2017 must have been assessed in 2017 for the deduction to count. Simply prepaying an anticipated property tax bill will not be deductible on your 2017 tax return, according to the IRS.
For those able to claim the deduction when filing their 2017 taxes — especially homeowners in states with relatively high taxes, like New York, New Jersey, and California — the savings will be worth the effort.
Deducting the full amount of your current property-tax bill in 2017 may provide an even larger tax benefit if your tax rate goes down next year under the new plan, according to the experts at TaxAudit, an audit defense service.
What are property taxes?
Property taxes are just that: taxes you pay on your property.
There are two kinds of property taxes, depending on the property's mobility:
- The real-estate tax: for property that can't be moved, such as a house or land.
- The personal property tax: for property that can be moved, such as an RV or a plane.
To get the property-tax deduction, you have to itemize your deductions.
How do I pay property taxes?
Property taxes are administered on a local level, so to pay early you'll have to check with your county to see how to do so.
For example, the New York City Department of Finance's page on property taxes explains how residents can pay electronically, by mail, or in person at any of its business centers.
But keep in mind that if you own a home, your mortgage lender may pay your property taxes from an escrow account.
Unfortunately, you can't pre-pay SALT anymore
We originally suggested that it may be worth it for some taxpayers to prepay their 2018 state and local income tax liability this year to maximize that deduction as well.
But that's no longer possible: The version of the tax bill that became law says state and local income taxes paid for any tax year beginning in 2018 will not be deductible on your 2017 taxes.
"As the Tax Cuts and Jobs Act seeks to simplify the tax code, a last-minute provision closed a potential new tax-planning strategy germinating before the bill even passed," Nicole Kaeding, an economist with the Center for State Tax Policy at the Tax Foundation, said in a post.