Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.
Many taxpayers have been wondering if they can "prepay" their 2018 real property taxes. In some areas of the country long lines formed beginning yesterday to pay property taxes. The issue is so widespread that the IRS has commented on it officially in the following e-news for Tax Professionals.
The IRS advised tax professionals and taxpayers today that pre-paying 2018 state and local real property taxes in 2017 may be tax deductible under certain circumstances.
The IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes. 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. 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 following examples illustrate these points.
Example 1-- Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017--June 30, 2018. 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 IRS is reminding taxpayers that a number of provisions remain available this week that could affect 2017 tax bills. Time remains to make charitable donations. See IR-17-191 for more information. The deadline to make contributions for individual retirement accounts--which can be used by some taxpayers on 2017 tax returns--is the April 2018 tax deadline.
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.
In addition to the IRS advice above, you should also make sure any required estimated state income tax payments have been made for your 2017 return. In most states the last estimated payment for 2017 is due January 15, 2018, but can be paid earlier. Technically, any amount overpaid is not deductible, in 2017. Thus, if you estimate you'll owe (in addition to withholdings) $3,000 for your state income taxes for 2017, pay them now and they'll be deductible in 2017. However, if you pay $15,000 under the same circumstances because you know you'll have to pay $12,000 in 2018, the additional $12,000 would not be deductible.
Talk to a tax professional about your situation. If you're subject to the alternative minimum tax in 2017, you may get little or no benefit from paying before the end of the year. There are potentially other situations where paying before the end of the year may not be advantageous.
Copyright 2017 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 12/27/17