Why are people trying to pay their property taxes early?
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Update: The IRS issued guidance Wednesday on paying property taxes early. Taxpayers can still deduct prepaid real estate or property taxes as long as the tax is assessed before 2018. This depends on local law. So even if your town accepts early payments for 2018 property taxes, if your property isn't assessed until after Jan. 1, you won't be able to deduct your early payments. However, if, for example, your town assesses property tax on July 1, 2017 for the period of July 1, 2017 through June 30, 2018 you could pay the bill early and deduct the cost, even if it's not due until 2018. Check the IRS website for more information.
Many people living states with high property taxes are rushing to prepay some of their 2018 taxes before the year ends, according to news reports from around the country. They're making this last-minute money move before the tax overhaul signed Friday by President Donald Trump takes effect.
The law changes the amount of state and local taxes you can deduct from your federal income tax payment, said Kathy Pickering, executive director of the Tax Institute at H&R Block. The amount will be capped at $10,000 starting in 2018. People are trying to prepay some of their 2018 taxes before the cap takes effect.
If you normally pay $20,000 in state and local taxes, as of 2018, you'll only be able to deduct half from your taxable income. But depending on where you live, you may have the opportunity to pay some of those taxes in 2017, said DeDe Jones, a certified public accountant, certified financial planner and managing director of Innovative Financial in Golden, Colorado.
You have a strong incentive to prepay some of your 2018 taxes and get them onto your 2017 tax return because you'll still be able to deduct more than $10,000, Pickering said.
For the most part, three things make up your state and local taxes in the eyes of the IRS:
State and local income tax
Real estate taxes
Personal property taxes on things like a boat or car
Under the tax law, you can't prepay state or local income tax, so everyone rushing to city hall in the next few days is mostly focusing on their real estate taxes, Pickering said. However, you still need to add up all these taxes to decide whether prepaying is worth it.
The easiest way to check is to look at your tax return from last year, Pickering said. Did you itemize your deduction? If so, look at the box that says, "Taxes you paid."
If the amount is greater than $10,000, you can take advantage of prepaying. But also make sure your state and local tax burden is the same as it was last year. If you moved or changed jobs, your deduction may be different.
Next, see if you can actually afford to prepay. Just because you have the ability to prepay doesn't mean you can afford to shell out an extra few thousand dollars before the end of the year.
You also need to call whoever collects your property taxes, most likely your local government, and ask if you're actually allowed to prepay your 2018 taxes. If they can accept the payment early, you may want to drop the check off in person. Be sure to collect a receipt so you can prove you paid in 2017, Pickering said.
The standard deduction is increasing from $6,500 to $12,000 for single filers and $13,000 to $24,000 for joint filers under the new tax law. If you itemized your deduction in the past, but plan to take the standard deduction in the future, you can benefit from prepaying.
Let's say you normally itemize your deduction, and it adds up to $10,000. Starting in 2018, it won't make sense to itemize because the standard deduction will be larger. That means 2017 is the last year itemizing will be worth it for you, so you should try to maximize deductions like property tax payments and charitable donations before the year is out, Jones said.
"If you can itemize this year but won't be able to next year, let's shove some more stuff into this year and get the benefit," she said.
This stuff is complicated. You have to know whether your town allows you to prepay your property taxes, whether you can afford to do so and whether you should itemize your deductions for 2017 in the first place, all during a time when you probably just want to have some eggnog. Think over these calculations carefully, Jones said.
"If you've got questions, you should talk to your tax preparer," she said. "It's not for the faint of heart."
And don't forget, there are ways to lower your taxable income even after the new year.
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