Should You Prepay Property Taxes Now?

The Internal Revenue Service made a valiant attempt to clear up some of the confusion surrounding whether people should prepay their 2018 property taxes — a maneuver intended to get around the $10,000 cap on deductions of local and state taxes under the Tax and Jobs Act.

The IRS said that in some cases these taxes will be deductible from this April’s filings, and then clarified by way of example that the municipal government in which a taxpayer resides would need to be able to receive prepayment.

Part of this ability comes from have systems already set up to allow prepayment of property taxes.

“Systems” here means both technology capabilities and oranizational issues or policy. As for the latter, the taxpayer would already know their property’s assessed value, meaning the municipal government’s valuation of real estate for the purpose of taxation.

Fiscal Year Timing

These values might be known already by taxpayers living in municipalities that have fiscal years that start before January 1 — July and September are common alternative starting dates.

The IRS’ announcement also allows room for the possibility that some municipalities did their property assessments earlier than usual this year specifically because of the new federal law.

This kind of timing makes more of a difference in municipalities that calculate property taxes based on annual assessed valuations — such as what happens the District of Columbia.

However, plenty of taxpayers already know their properties’ assessed values for property tax purposes because the law in their jurisdiction bases property tax calculations on the value of the property last time it sold or had significant construction — which is how things are done throughout California.

Today’s announcement by the IRS appears to be an effort to minimize the number of restatements and amendments of tax returns for the coming April 15 deadline.

Prepayment Doesn’t Guarantee Deductibility

The agency is still not guaranteeing anyone that prepayment of property taxes before the end of the year will make any difference in whether they can be deducted from federal taxes.

People are going ahead and putting their year-end bonuses toward prepayments instead of investing them elsewhere, after numerous refrains of this tactic by personal finance pundits in their analysis of the Tax and Jobs Act.

Signed into law the Friday before Christmas, the law imposes a $10,000 cap on the amount of state and local taxes that can be deducted from federal returns.

Rushed Law

However, the rushed nature of the final enactment has resulted in some roughly written portions of the law that has resulted in a lot of speculation about how the IRS will implement details that still remain unclear in the actual legislation.

Unfortunately, the IRS has much less lead time than usual to decide how it will implement changes like the $10,000 cap on state and local tax deductions — which is why it’s prudent to assume that prepaying won’t guarantee deductibiity.

The idea of prepaying property taxes seems to have come up because it’s the one type of state and local taxation that most people usually haven’t already prepaid.

Whether a municipality’s property tax becomes expensive enough to make someone want to prepay their taxes may have more to do with which valuation of the property is used rather than the actual percentage rate.

Home Buying May Slow

It’s possible that other aspects of the Tax and Jobs Act might have a more profound impact upon the housing market than the deductibility of property taxes.

Most notably, mortgage borrowing is expected to slow down if interest rates rise as a result of the increase in the federal budget deficit that’s expected to result from the cost-cutting specified in the Tax and Jobs Act.

However, the rise in the deficit is expected to only be temporary because the tax cuts all expire by 2027.

Since the IRS has yet to decide whether it will allow prepayment of 2018 property taxes to count toward the deductions for the 2017 tax year, it’s unclear whether attempting to make an advance payment will do any good.

Should You Prepay Property Taxes?

Remember that these deductions simply reduce the amount of money that taxes are assessed upon — so unless the deduction would make the difference between which tax bracket you fall into, the savings won’t turn out to be as much as some of the coverage makes it sound like.

Assume that savings is a four digit number at most. Even if your tax bracket changes as a result of what you deduct, the amount of savings might still be less than what you could easily gain by April 15 if you instead invested that bonus money in the capital markets.

Or use that bonus money to pay down more debt, since interest rates are expected to rise in the not-too-distant future.

Readers, what are your concerns about the changes that will come once we know how the Tax and Jobs Act will be implemented?

Jackie Cohen

Jackie Cohen is an award winning financial journalist turned turned financial advisor obsessed with climate change risk, data and business. Jackie holds a B.A. Degree from Macalester College and an M.A. in English from Claremont Graduate University.