A key provision of the newly signed tax bill modifies a long-standing break that allowed individuals to deduct any state and local property taxes paid that year. The new bill limits the itemized tax deductions for state and local taxes to $10,000. In response to reports of taxpayers lining up to prepay their 2018 taxes before the bill goes into affect, the IRS issued an advisory notice that the loophole may be narrower than many believe.
“The IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes. In general, 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. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.”
A number of municipalities told residents before the IRS notice that they would not accept advance payments for taxes owed during the second half of calendar year 2018, since those taxes won’t be set until new fiscal year assessments are confirmed. The situation is more uncertain in states that have accepted prepayments even though they have not officially issued tax bills for all or parts of 2018. Complicating matters further is the fact that many homeowners have their property taxes paid by their mortgage lenders thru escrow accounts.
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