President Trump signed sweeping tax legislation in 2017 that capped property taxes and other state and local taxes (SALT) deductions at $10,000. This change went into effect in January 2018, which impacted 2018 taxes that were filed in April 2019. The SALT deduction became a major worry for many homeowners in high-tax states. To lessen the impact, some of these homeowners prepaid property taxes for 2018 by December 31, 2017 to deduct them from their 2017 tax bill. Let’s take a look at the tax advantages of paying your taxes before January 1.
Paying early isn’t a simple process for most people, and it might not even be the right move for you. Read on as we explain who can pay their property taxes early and how to do so.
What to Know About Prepaying Your Property Taxes
First things first, if you take the standard tax deduction, this doesn’t affect you. Only those who itemize their tax deductions need to worry about this change, which is about 30% of taxpayers, according to the Tax Foundation. Second, this change mainly impacts those who earn over $100,000 and have high-value properties in areas with high property taxes such as New Jersey, New York, Illinois, Connecticut and California. If your property tax bill is nowhere near $10,000 each year, you likely don’t have to worry about this change.
However, homeowners who did fit into the categories above could have saved thousands by prepaying their property taxes for 2018 before December 31, 2017. This was because the SALT deduction allowed property owners to deduct an unlimited amount of property taxes. For instance, the average homeowner in Westchester County, New York had a property tax bill upwards of $16,000 in 2016, according to lohud.com. With a tax bill that large, it was worth calling your town supervisor or visiting your tax collector’s office to see if you could have paid early.
You should note that you can only deduct property taxes on federal tax returns when you have an official bill from the tax assessor for the following year. This means that a taxpayer can claim a deduction for 2021 taxes on their 2020 tax return (due on May 17), as long as they got the tax bill and paid it before December 31, 2020.
What Has the IRS Said About Early Payment
For the Trump tax change, the IRS issued an advisory statement on December 27, 2017 in response to inquiries about prepayment, saying: “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.”
This means that if your state or local county’s assessment schedule doesn’t align, you won’t be allowed to deduct the payment on your 2018 taxes.
For example, if your county’s property tax assessment schedule is from June 1, 2017 to June 1, 2018, you can pay through June 1, 2018, but you can’t pay for the assessment of June 1, 2018 to June 1, 2019 in 2017 and claim it. You can only deduct what’s assessed in 2017 even if your county accepts payments in the second scenario (according to the IRS).
Keep in mind that each state treats taxes differently, so it’s worth checking with your local government. For example, in New York, Governor Cuomo signed an executive order that allows local governments to levy taxes ahead of schedule. How the IRS will treat these situations has not yet been determined, however, so it’s not cut and dry whether state laws will supersede IRS guidelines.
How to Prepay Property Taxes
You’ll need to contact your county’s office that collects property tax. In some regions your town supervisor’s office takes care of this, in others, you can find information via a county or state finance page. It depends on where your property is located and will differ across county lines. You can check your last tax bill to find a contact number, email, website or office location. Some areas will allow electronic payment, while others will need you to come in person.
Who Can’t Prepay Property Taxes?
You might have trouble prepaying your property taxes if you generally pay through an escrow account. This means that your bank withholds money for taxes and insurance usually by sending you your mortgage bill with both charges added on top. That surplus money sits in your escrow account until property taxes or insurance payments come due and your bank cuts the check. If you try to get ahead by paying your county early for 2018, your records and the bank’s won’t match and you may be subject to an IRS audit. An audit isn’t the end of the world, but it does take time and you’ll need all your supporting documents.
You also can’t prepay if you’re subject to the alternative minimum tax. And like we discussed above, if your county hasn’t assessed your property for taxes in 2017, you can’t pay early based on an estimate.
Your county also might not accept prepayment. Property taxes differ state to state and county to county, and are administered at the local level. That means different laws and jurisdictions for each area in the U.S. What you might be able to do for your property isn’t the same as a family member across the U.S. You’ll have to check with your local tax assessment and finance office to be certain.
Finally, if you don’t itemize your tax deductions, there’s no reason to prepay.
You might be able to save money this tax season by taking advantage of prepayment. However, your county has to have assessed your property in before the end of the tax year for you to be able to claim it. Also, you should note that states treat taxes differently. So in some places, prepaying your property taxes may not have any benefit, and at worst, you might give your local government an early payment for no reason (money that could be earning interest for you in a savings account).
Tips to Help You Survive Tax Season
- A financial advisor can help optimize your tax strategy for your financial goals. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors who can help you achieve your financial goals, get started now.
- Not sure what you’ll owe come tax time? Plug your information into our income tax calculator. You can find the exact breakdown of what you owe for federal income taxes.
- When the tax code changes, it’s a good idea to use a good tax filing service. We did our annual roundup of the best tax filing software so that you can get through this tax season as painlessly as possible.