IRS: Assessment Date Matters For SALT Deduction

With the drop of the ball on New Year’s, new tax laws go into effect, and state and local tax (SALT) deductions get capped at $10,000. Eager to maximize their deductions, masses of taxpayers are storming county finance offices to pay property taxes before the end of the year and potentially deduct their full property tax bill for the last time.

However, questions remain regarding whether the property tax prepayments are, in fact, tax deductible. In response, the IRS heeded the call for clarity and released an advisory on Wednesday:

The Internal Revenue Service 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.

Those “certain circumstances” are that the assessment must be made before 2018, and the payment must be made before 2018:

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 release contains this hypothetical, of potential relevance to Maryland taxpayers:

County B … 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.


Relatedly, the State Department of Assessments and Taxation just released their latest property assessments, for “Group 3” – days before the end of 2018.