Tax Reform 2017: Can I Deduct My Property Taxes I Prepaid in 2017 Under the New Tax Law?

Tax Reform

On Friday, December 22, the President 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 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’s 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 you’re subject to the new $10,000 limit, one tax move that may help you is to prepay your property taxes by December 31. The IRS just put out guidance on this to help taxpayers understand when it is ok to prepay property taxes.

If you’re considering prepaying the second installment of your property taxes by December 31 of this year, but are unclear about whether you can still deduct those prepaid property taxes, we are here to clear things up.

  • According to the IRS, pre-paying 2018 state and local property taxes in 2017 may be tax deductible under certain circumstances.
  • You may be allowed a tax deduction for the pre-payment of state or local real property taxes in 2017 if two conditions are met:
    • you make the payment in 2017, and
    • your taxes were assessed before 2018 (in most cases, this means you 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 municipality if you are unsure about when your taxes were assessed and also double check if they will accept prepayments of your 2017 second installment.

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

Example 1: Assume your county assesses property tax on July 1, 2017, for the period July 1, 2017 – June 30, 2018. On July 31, 2017, your 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 you paid the first installment in 2017, you may choose to pay the second installment on Dec. 31, 2017, and may claim a tax deduction for this prepayment on your 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. You’ve got to make the payment in 2017 and it can only be in response to a valid assessment you’ve received before 2018.

If you can prepay your second installment property taxes that were assessed for 2017 and your county assessor will accept them, you still have a few days to make this, along with other smart end of year tax moves to maximize your tax deductions and tax refund for 2017.

Don’t worry about knowing every detail of the new tax bill. TurboTax has you covered and is up to date with the latest tax laws. TurboTax will ask you simple questions about you and give you the tax deductions you’re eligible for based on your answers. You can also connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get one-on-one personal tax advice and have your tax return reviewed so you can sign and file with complete confidence.

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