On December 27, 2017, the IRS issued IR-2017-210 (the Advisory), providing guidance on the deductibility for federal income tax purposes of prepaid property taxes. The Advisory cautioned taxpayers that in order for prepayments of 2018 property taxes to be deductible, the 2018 property taxes must be assessed prior to 2018.
The Tax Cuts and Jobs Act (the Act), signed last week by the President, imposes a $10,000 limit on the deductibility of state and local taxes (other than those incurred in a trade or business or for-profit activity). The Act foreclosed the possibility of prepaying state and local income taxes; under the Act, tax payments relating to future tax years are considered paid in those future tax years. The Act, however, imposed no such limitation on prepayments of property taxes, leading many taxpayers to seek additional state and local tax deductions in 2017 by prepaying 2018 property taxes.
Prepaid Taxes Must Be Assessed
The Advisory cautions, however, that simply making a prepayment of 2018 taxes in 2017 is not sufficient. To be deductible, the Advisory notes that the 2018 taxes being prepaid must also have been properly assessed or levied, under state or local law, in 2017. The Advisory gives two examples:
Many jurisdictions, particularly those in high property tax states, have sought to speed up the assessment process to facilitate prepayments. In New York, for example, Governor Cuomo issued Executive Order No. 172 (the Order) authorizing local jurisdictions to issue warrants for the collection of a portion of 2018 taxes prior to 11:59 p.m. on December 28, 2017.
Consult Your Berdon Tax Advisor
Whether you should prepay your 2018 property taxes (assuming your local jurisdiction has properly levied all or a portion of 2018 taxes) depends on a number of factors and, ultimately, on your individual tax situation. Depending upon your AMT position, for example, you may not realize the benefit of the prepayment because of the AMT add back for state and local tax deductions. Consult your Berdon tax advisor both on the deductibility of a prepayment you are looking to make, as well as on whether prepaying your property taxes makes sense given your tax position.
If you have any questions about this Alert, please contact:
Wayne Berkowitz at 212.331.7465 | wberkowitz@BERDONLLP.com
Or contact your Berdon tax advisor.