Prepaying Your 2017/2018 Second Installment of Property Taxes in 2017
Submitted by Desmond Wealth Management, Inc. on December 21st, 2017Thinking about prepaying some of your 2018 state taxes in advance of limitations imposed by the Republican tax plan?
Well, forget about it.
Expecting a limitation, a number of tax advisers started to suggest that taxpayers should prepay their 2018 tax liability in 2017 to maximize the deduction before the cap went into effect. However, the new bill shuts the door on this tax planning strategy. The bill states that state and local taxes (SALT) paid for any tax year beginning in 2018 is only deductible in tax years after 2017.
HOWEVER, accelerating your property tax payment on your home may be a good idea Why? It will defer tax, which usually is beneficial. Prepaying property tax may be especially beneficial this year, because proposed tax legislation might reduce or eliminate the benefit of the property tax deduction beginning in 2018.
2017 year-end planning
You can prepay (by December 31) property taxes that relate to 2017 but that are due in 2018 and deduct the payment on your 2017 return. But you generally can’t prepay property tax that relates to 2018 and deduct the payment on your 2017 return.
Prepaying property tax will in most cases be beneficial if the property tax deduction is eliminated beginning in 2018. But even if the property tax deduction is retained, prepaying could still be beneficial. Here’s why:
- If your property tax bill is very large, prepaying is likely a good idea in case the property tax deduction is capped beginning in 2018.
- If you could be subject to a lower tax rate in 2018 or won’t have enough itemized deductions overall in 2018 to exceed a higher standard deduction, prepaying is also likely tax-smart because a property tax deduction next year would have less or no benefit.
However, there are a few caveats:
- If you’re subject to the AMT in 2017, you won’t get any benefit from prepaying your property tax. And if the property tax deduction is retained for 2018, the prepayment could cost you a tax-saving opportunity next year.
- If your income is high enough that the income-based itemized deduction reduction applies to you, the tax benefit of a prepayment may be reduced.
- While the initial versions of both the House and Senate bills generally lower tax rates, some taxpayers might still end up being subject to higher tax rates in 2018, either because of tax law changes or simply because their income goes up next year. If you’re among them and the property tax deduction is retained, you may save more tax by holding off on paying property tax until it’s due next year.
Next Steps
We will keep you informed on new related to the tax bill expected to be passed this week. We always do our best to help you make the best decision based on tax law changes and implementation given your specific situation.