Prepaying your property tax? IRS cautions it won’t repay

The Inside Income Service has a message for the owners speeding to prepay their property taxes earlier than new guidelines take impact on New Yr’s Day: Not so quick.

The tax invoice that President Trump signed into legislation final week sharply restricted the itemized deductions for state and native taxes whereas elevating the usual deduction for people and . These guidelines don’t take impact till 2018, nonetheless. That has led some owners, notably in high-tax, prosperous areas, to attempt to prepay their 2018 property taxes earlier than the deduction disappears.

In an advisory discover posted to its web site on Wednesday, the I.R.S. mentioned that maneuver might work, however solely below restricted circumstances. To qualify for the deduction, property taxes not solely should be paid in 2017, they need to even be assessed in 2017 — that means that owners who pay as you go their taxes primarily based on estimated assessments, or who tried to pay a number of years’ value of taxes directly, will in all probability be out of luck.

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“These people now are usually not getting the advantages of these prepayments,” Nicole Kaeding, an economist on the Tax Basis, mentioned of people that paid taxes that had not but been assessed. “All that you’ve got accomplished is supplied an interest-free mortgage to your municipal authorities.”

It’s not clear how many individuals have tried to prepay their taxes. In Fairfax, Va., a whole bunch of individuals lined as much as prepay taxes on Tuesday, in response to native media studies, and communities in New York, New Jersey and different states have likewise reported a rush of prepayments.

Some states have inspired residents to attempt to skirt the brand new cap on state and native tax deductions. Final week, Gov. Andrew M. Cuomo of New York signed an govt order paving the way in which for residents to prepay their property taxes.

“We’re doing this to bypass the invoice the president simply signed?” Mr. Cuomo requested at a Friday information convention. “You are rattling proper I’m.”

These efforts might nonetheless succeed. The I.R.S. steering is recommendation to taxpayers and tax preparers, not a authorized ruling. And the company didn’t outline what it means for a tax to be “assessed.”

That might grow to be a key query. Property tax schedules range broadly from state to state and even county to county. Some states have already despatched out tax assessments for a part of 2018, even when the funds are usually not due till subsequent yr. In these states, tax attorneys mentioned, owners who prepay taxes will nearly definitely be capable to deduct their taxes below the 2017 guidelines.

Different states haven’t even begun the 2018 evaluation course of. In these states, prepayment nearly definitely won’t assist taxpayers.

And in some states, owners might have acquired estimated assessments or taxes due in 2018 primarily based partly on assessments from earlier years. Equally, Mr. Cuomo’s govt order allowed native governments to levy taxes forward of schedule. How the I.R.S. will deal with such instances stays unsure.

“It is an open query proper now,” mentioned David Herzig, a professor of tax legislation at Valparaiso College. “It is determined by your state. There’s going to be no uniform reply.”

Mr. Herzig mentioned the I.R.S. steering was additionally primarily based on restricted precedents and might be overturned by a authorized problem. Consequently, he mentioned, many taxpayers may prepay and hope that the courts rule of their favor.

That might be a dangerous technique for some taxpayers, nonetheless. Andy Grewal, a professor of tax legislation on the College of Iowa, mentioned that owners who paid their taxes into an escrow account — a standard observe — might find yourself dealing with an audit in the event that they prepay, as a result of the tax funds they report back to the I.R.S. will differ from these reported by their banks.

“I believe folks must be conscious that there might be some administrative complications that come out of this,” Mr. Grewal mentioned.

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