December 28, 2017
Many taxpayers are reading about the prepayment of property taxes and taking advantage of the state tax deduction on their federal return before it changes on January 1, 2018. This has raised a number of questions as to whether a taxpayer can make a prepayment of property taxes and whether this prepayment is an eligible deduction.
These questions are further complicated because of terminology and timing of assessment and lien dates and most of these taxes are locally administered. Alaska, Connecticut, Maine, Pennsylvania and Rhode Island are examples where the local municipalities set the payment dates. The governors in both New York and New Jersey have issued emergency executive orders within the last week ordering local governments to accept prepayments of property taxes.
Other local governments have called emergency hearings to change ordinances to accept property tax payments. How these local law changes creating a deduction will be viewed by the IRS is unknown, but it could raise some scrutiny.
In the meantime, the IRS issued advisory examples on the prepaying of property taxes (IR-2017-210, Dec. 27, 2017):
Example 1: Assume County A assesses property tax on July 1, 2017, for the period July 1, 2017, to June 30, 2018. On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.
Example 2: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017, to June 30, 2018. County B intends to make the usual assessment in July 2018 for the period July 1, 2018, to June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.
Iowa is an example of when taxes can be prepaid. Iowa assesses tax on January 1 and taxes have the option of being paid in one full payment (September 1) or in two installments (September 1 and March 1). The second payment of March 2018 can be prepaid, but payments beyond March cannot be prepaid.
The Real Question
The basic question is whether the property owner has a bill and if this bill allows an installment payment beyond January 1, 2018. In this case, it is likely the property tax is deductible if the taxing jurisdiction will accept the payment. For example, Florida only allows installments if the property owner completes an application by April 30. So for a Florida taxpayer, this means an application will have had to be completed by April 30, 2017, for any installment payments due in 2018 to be deductible.
While on the surface it seems like a simple task to make an early property tax payment and receive a federal state tax deduction, the ultimate ability, and result, is much more complicated. Contact your Eide Bailly professional or a member of our state and local tax team for additional information.