The IRS has issued an advisory that is causing massive confusion among taxpayers in high-tax states who were planning to prepay some or all of their 2018 property taxes during the final days of 2017 because the tax bill Congress just passed sets a $10,000 limit on deductions for state and local property and income taxes combined.
The bill explicitly disallows any prepayment of state and local income taxes but implicitly allows for prepayment of local property taxes, although that is not spelled out clearly. As a result, the IRS reported it has received “questions from the tax community concerning the deductibity of prepaid real property taxes,” which is why it issued its advisory.
The advisory states that “a prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.”
In other words, taxpayers can only prepay 2018 property taxes that have already been billed — the IRS uses the words “assessed prior to 2018” — not taxes that they estimate themselves.
“What would not be deductible is calculating your property tax liability independently and remitting that,” says Nicole M. Kaeding, an economist with the Center for State Tax Policy at the Tax Foundation.
Even if the payment were based on a calculation using the official assessment of a taxpayer’s home multiplied by the official local tax rate it would not be allowed, explained Kaeding. Tax liabilities posted online would suffice as a tax bill.
The confusion for many taxpayers is due in part to the IRS’ use of the word “assessed,” since assessments usually refer to property values, not tax liabilities.
“Asessments relate to the value of a property and then the tax rate is applied to that,” says, Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, a nonpartisan think tank based in Washington. “That language is not even in the tax bill.”
Given the confusion, should taxpayers in high-tax states prepay their local property taxes?