Property tax prepayment deadline looms as homeowners scramble

  • The IRS says estimated payments for property taxes that have not been assessed yet will not be deductible on 2017 tax returns.
  • If the tax has been assessed but is not due until 2018, you can deduct the amount for this year as long as it's paid by Dec. 31.

Homeowners wondering whether they should pay their 2018 property taxes in advance of the changing tax law are running out of time.

While the deadline is Dec. 31, to make this work, a number of things have to align in your favor: you have at least part of your 2018 tax bill in hand, you're not subject to the alternative minimum tax (AMT) and your local municipality is open and set up to take the payments. (Some offices may be closing early for the holiday weekend.)

Because of guidance issued by the Internal Revenue Service, the decision may be moot. In the midst of taxpayers across the country lining up at their local tax offices to pay those bills early, the federal agency threw a last-minute wrench into taxpayer plans by limiting what payments can count against their 2017 tax returns.

"A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017," according to the IRS announcement.

Basically, this means:

  • If you have a property tax bill in hand — which means the tax has been assessed — you should be good to go. Even if it isn't due until next year, you can prepay. The amount can be taken as a deduction in 2017 if you itemize your deductions on your tax return (as opposed to taking the standard deduction). About 49 million taxpayers, or 28 percent, currently itemize, according to the Urban-Brookings Tax Policy Center.
  • If your local taxing authority says it will accept prepayments but the tax has not yet been assessed — in which case your payment would be an estimated amount — the payment likely is not deductible on your 2017 tax returns.

Either state or local law determines when a property tax is assessed, which generally means the time at which the taxpayer becomes liable for the tax, according to the IRS.

If you have not received a bill for property taxes due in 2018, there's a good chance they have not yet been assessed. However, the only way to know for sure is to contact your local city or county taxing authority.

It's worth noting that if your property taxes are held in escrow — i.e., part of your monthly mortgage payment includes an amount dedicated to property taxes — you would need to contact your lender or the loan servicer to find out options for prepaying.

At Wells Fargo, for example, customers with already assessed tax bills due early in 2018 can request that payment is made before Dec. 31, but a bank spokesman said requests received after Thursday might not allow enough time for the payments to be processed in time.

Both Wells Fargo and Quicken Loans said they cannot release funds for unassessed taxes because the amount is unknown. Additionally, customers who decide to prepay directly to their local taxing authority will have to wait for the next annual escrow analysis to get back any unused property tax funds held in escrow.

The final version of Republican tax-overhaul legislation imposes a $10,000 deduction limit on the combined value of property taxes and state and local income taxes (also known as SALT) beginning in tax year 2018.

The legislation also disallows a deduction in 2017 for any prepayment of SALT. But with no specific ban on property-tax prepayment, many homeowners — especially those in high-tax states — have headed to their local government offices to prepay. In many cases, it's being done with the blessing of the taxing authority.

"What we're telling residents is that we'll accept these prepayments but they should check with a financial advisor first." -Charles Strome, city manager for New Rochelle, New York

For instance, in New Rochelle, New York, where a portion of taxes due in 2018 (and already assessed) are being accepted early, residents already have prepaid about $15 million. The average annual property tax bill there tops $18,000.

"What we're telling residents is that we'll accept these prepayments but they should check with a financial advisor first," said Charles Strome, city manager for New Rochelle.

Thursday morning, the line of prepaying taxpayers was out the door, Strome said.

However, unlike New Rochelle, not all jurisdictions that have said they will accept early payments have actually assessed the taxes being prepaid. That is, the taxpayer would be making estimated payments because the exact amount has not yet been determined.

And in those cases, it's unclear whether local tax offices will reimburse taxpayers if those payments won't count against their 2017 taxes or whether the IRS guidance will be challenged.

Something else to keep in mind: If you are subject to the alternative minimum tax, prepaying might not be beneficial. Under that formula, real estate taxes (and other local taxes) generally are not deductible.

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