IRS Says Pre-Paying Property Taxes May Not Work

What’s the story?

Under the new tax law that takes effect January 1 deductions on state and local income and property taxes are capped. Municipalities and taxpayers in high-tax states like New York, New Jersey and California have been scrambling so that 2018 property taxes can get pre-paid before the new law goes into effect.

But now, the New York Times reports, the IRS says that not all prepayments will be eligible for deduction in 2017.

The IRS posted an advisory notice on Wednesday, stating that in order to qualify for the deduction property taxes must be both paid and "assessed" in 2017.

However, the notice is not a legal ruling, nor does it clearly define what it means for a tax to be "assessed".

Some localities have already sent out tax assessments for part of 2018, even if the payments are not due until next year. Those prepayments are probably eligible. But if assessments are based on prior years or haven’t even been done, prepayments may not be deductible.

Taxpayers can roll the dice, hoping the notice will be legally challenged and the courts will rule in their favor, but if you pay enough in property taxes for prepayment to be a significant deduction, then that’s an expensive gamble.

What do you think?

Are you prepaying property taxes to take the deduction before the new law goes into effect? Do you think the IRS should allow the deduction, or do you think folks are gaming the system?

Tell us in the comments what you think, then use the Take Action button to tell your reps!

Take Action

— Asha Sanaker

(Photo Credit: Chris Potter via Flickr / Creative Commons)