In response to the portion of Congress’s tax reform bill which caps the state and local tax deduction at $10,000, many news outlets and others have shopped around the idea of paying property taxes early in 2017 – enabling itemizers to deduct as much local property tax as possible before the cap goes into effect. However, a number of questions remain as to whether this is authorized and, if so, practically feasible.
The Montgomery County Council considered passing a local law enabling acceptance of property tax prepayments. After quick and due consideration, however, the County Council determined that trying to pass a new law and implement a whole new process in about a week “could result in confusion and errors,” according to Bethesda Magazine. From that coverage:
[County Council member Roger] Berliner pitched the idea as a way for property owners to reduce their tax payments before the federal tax-cut bill approved by Congress Wednesday goes into effect. President Donald Trump has said he will sign the bill.
The tax-cut bill caps the state and local tax deduction to $10,000, which is expected to result in higher income tax payments for individuals who itemize their deductions and have high-value homes or properties—such as those valued at $1 million or more.
The bill bans prepayment of income taxes, but did not do the same for property taxes, which has led to suggestions from experts to consider prepaying property taxes to reduce payments before the bill goes into effect. Washington, D.C., Mayor Muriel Bowser announced Wednesday the city would accept 2018 property tax prepayments.
While Maryland has authorized counties to pass legislation to accept prepayment of property taxes, the county has not done so.
Some Maryland counties have enabled acceptance of prepayments, and some have not. Others accept “overpayments” and credit those overages to an appropriate account, but may not necessarily call that a “prepayment.”
It is not entirely cut and dry, either, whether property tax prepayments can be deducted in full if paid in 2017 – and if they can, which payments qualify. Earlier this week, the Government Finance Officers Association sent out guidance stating that:
An individual may not claim an itemized deduction in 2017 on a pre-payment of tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.
Between Monday and Thursday, they updated this guidance, limiting this prohibition to income tax prepayments only:
An individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.
If property tax prepayments are wholly deductible, it may matter when the property assessment took place. From the Associated Press:
While the bill doesn’t expressly address the prepayment of property taxes, doing so might be ill-advised.
You can only pay property taxes that you have already been assessed for, says Mark Steber, chief tax officer at Jackson Hewitt. Every taxing authority runs on a different schedule, so the timing of your assessment will vary by location.
So if you have a bill for property taxes due now or early next year, go ahead and pay it now, he says. What you shouldn’t do, Steber says, is pay this year for taxes that haven’t been assessed yet because that runs against the intent of tax law.
Finally, the limitation on deducting income tax prepayments muddles things even more. From the Tax Foundation:
The [final tax reform] bill states that taxes paid for any tax year beginning in 2018 is only deductible in tax years after 2018.
However, this restriction is only binding on income taxes, which seems a bit off at first glance. But it makes rational sense given the way the SALT deduction is used in practice. …[W]ith the new $10,000 cap, many individuals taking the new SALT deduction would likely be maxed out under income, so the property tax side becomes less important. But really, there is an underlying ease of payment issue here as well. Property tax payments frequently cross calendar years. Many localities tax in arrears, so it’d likely be challenging to apply the limit to property taxes.
Bottom line: feel free to contact your county to find out whether they accept prepayments. But, consult your tax attorney or accountant regarding whether those specific prepayments are actually deductible in 2017.