Tax Reform 2017: Can my Clients Deduct Property Taxes They Prepaid in 2017 Under the New Tax Law?

On Friday, Dec. 22, President Trump signed the largest piece of tax reform legislation in more than three decades. The new tax law will affect most taxpayers. One point to keep in mind, though, is that for the vast majority of people, the new tax laws do not affect their taxes for 2017 (the ones they file in in the first months of 2018).

One key tax change that may impact taxpayers’ taxes in 2018 (those taxes filed in 2019) is that, beginning with their 2018 taxes, there is a new $10,000 cap on the sum of state and local income, sales, and/or property taxes they can deduct. Previously, there was no limit on these deductions.

If your clients are subject to the new $10,000 limit, one tax move you can help them make is to prepay their property taxes by Dec. 31. The IRS put out guidance on this to help taxpayers understand when it is okay to prepay property taxes.

If your clients are considering prepaying the second installment of their property taxes by Dec. 31 of this year, but are unclear about whether they can still deduct those prepaid property taxes, we are here to clear things up:

• According to the IRS, pre-paying 2018 state and local real property taxes in 2017 may be tax deductible under certain circumstances.
• Taxpayers may be allowed a tax deduction for the prepayment of state or local real property taxes in 2017 if two conditions are met:
  1. they make the payment in 2017, and
  2. their taxes were assessed before 2018 (in most cases, this means they got a bill for them).
• Prepaid real property taxes that have not been assessed prior to 2018 are not tax deductible in 2017.
• State or local law determines whether and when a property tax is assessed, which is generally when you become liable for the property tax imposed. You can check with your clients’ municipalities if you are unsure about when their taxes were assessed, and also double check if they will accept prepayments of their 2017 second installment.

Here are a few examples to also help you figure out if your clients’ prepayment of property taxes is tax deductible:

Example 1: Assume the county assesses property tax on July 1, 2017, for the period July 1, 2017 – June 30, 2018. On July 31, 2017, their assessor sends notices to residents notifying them of their assessments 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 they paid the first installment in 2017, they may choose to pay the second installment on Dec. 31, 2017, and may claim a tax deduction for this prepayment on their 2017 return.

Example 2: A different county assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018.  The same assessor intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019.  Because county residents wish to prepay their 2018-2019 property taxes in 2017, the assessor 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 2017 taxes since the property taxes were not assessed in 2017.

So that’s it. Your clients have to make the payment in 2017, and it can only be in response to a valid assessment they have received before 2018.

If your clients can prepay their second installment property taxes that were assessed for 2017 and their county assessor will accept them, they still have a little time to make this and other smart end-of-year tax moves to maximize their tax deductions and tax refund for 2017.

Continue to check back with the Intuit® ProConnect™ Tax Reform Resource Center for up-to-date information. We are closely monitoring progress and will give you important updates as they occur.

Resources

• Policy highlights
• Joint explanatory statement
• Legislative text