The new tax law recently signed by President Trump limits annual itemized deductions for all non-business state and local taxes, including property taxes, to $10,000.00 after 2017.
Because many people’s property taxes are greater than $10,000.00 per year, many individuals attempted to prepay their state and local property taxes for 2018 before the end of 2017. In doing so, these individuals attempted to take advantage of the more generous property tax deduction under the current law and attempted to avoid the imposition of the less generous deduction as a result of the new tax law in 2018.
National news reports showed people lining up at their County Treasurer’s office to prepay their 2018 property tax liability before the end of 2017. Unfortunately, and after many people had already prepaid their property tax liability, the IRS stated that a deduction for the prepayment of state or local real estate property taxes in 2017 “depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018.”
The distinction the IRS is making is whether the property tax in issue was paid “before it was assessed” or “after it was assessed.” The word “assessed” here essentially refers to whether bills for the property tax in issue were sent out in 2017 which, in virtually all of these cases, had not yet been sent.
If the property tax was paid before the bills were sent out, the IRS essentially stated that the property tax deduction for the unassessed liability would not be deductible in 2017. Because most property taxes for 2018 have not yet been assessed, the prepayment of the property tax in 2017 would not give rise to the deduction of those taxes in 2017, meaning that all of those people that stood in line to prepay their taxes may have wasted their time and some of their money.
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