IRS Says Prepayment of 2018 Property Taxes Will Not be Deductible in 2017 if Not Actually Assessed
Many U.S. taxpayers are trying to prepay their 2018 real property taxes by Dec. 31 in order to avoid the $10,000 cap on deductibility of state and local taxes that will go into effect for the 2018 tax year under the new tax law signed by President Trump last week. The IRS said in a news release today that the prepayment of 2018 real property taxes before year-end will be deductible on your 2017 income tax return only if the tax has been assessed in 2017. This means that homeowners in many states will not be able to deduct their 2018 real property taxes on their 2017 returns. For example, if the assessment date under state law for 2018 is Jan. 1 (as it is in many states), the prepayment of tax on Dec. 31, 2017 would not be deductible. On the other hand, if the state law specifies an assessment date in the middle of the year, then you would be able to deduct the portion of the taxes that accrue in 2018 so long as you pay by Dec. 31. The IRS press release gives two examples of such a situation. In example 1, the assessment date under the state law is July 1,2017, with two installment due dates, the first installment due on Sept. 30, 2017 and the second installment due on Jan. 1, 2018. In this example, if the second installment due on Jan. 31, 2018 is paid by Dec. 31, 2017, it would be deductible on the 2017 tax return, since it was assessed in 2017. However, example 2 says that prepaying anticipated tax to be assessed on July 1, 2018 in 2017 would not be deductible on a 2017 return.
If you are in a state where a deduction for a portion of the 2018 taxes is allowed, you will need to make the payment by year-end. You do not necessarily have to stand in line at the tax office to pay. It would be adequate to mail the payment in by year-end (if the taxing authority provides this option for prepaying tax payments due in 2018 by mail), but you should be able to document that it was mailed by Dec. 31. The best way to do this would be to mail it from a post office by certified mail, return receipt requested, and ask the postal clerk for a receipt to show it was mailed by Dec. 30 (since post offices will not be open on Sunday, Dec. 31). You should write on the portion of the receipt that will be stamped to confirm delivery your name with statement “Payment of 2018 property taxes” to be able to prove payment in 2017.
Unfortunately, state income taxes for the 2018 tax year are not deductible if prepaid in 2017. Here, the law expressly prohibits a deduction for pre-paid 2018 state income taxes on a 2017 tax return. However, any estimated tax payments that are made in 2017 for 2017 state income taxes would be deductible. Accordingly, it would be beneficial to pay any state estimated tax payment for the 2017 tax year that is due in January 2018 by Dec. 31 this year, so that the estimated tax payment can be deducted on your 2017 federal income tax return. Once again, you should be able to document that the estimated tax payment was mailed by Dec. 31.
So if you are thinking of standing in line at the tax collector’s office to prepay you 2018 taxes this week so that you can deduct them on your 2017 return before the $10,000 limit on state and local taxes kicks in, you might be disappointed.
It is possible that the IRS might change its mind, or that Congress might pass a law to allow a deduction for 2018 taxes paid this year, or the IRS position might be struck down by the courts, but for now, it looks like the prepayment of taxes before they are assessed will not be deductible for 2017. Linked is a 50 state chart from Checkpoint showing the assessment date for real property taxes.