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State and Local Property Tax Deduction Update

Internal Revenue Service|Tax|Tax Reform

By PJ Rogers

New bipartisan legislation introduced in the House, titled “The Cutting Local Taxes by Reinstating SALT Bill (HR 4789)” (the “Bill”) would now allow a deduction for prepaid 2018 property taxes paid in 2017.  This new proposal would provide certain taxpayers with an opportunity to claim a deduction for prepaid property taxes paid in 2017 defeating a $10,000 ceiling on the deductibility of state and local taxes recently enacted by The Tax Cuts and Jobs (the “Act”). 

Under the Act, beginning on January 1, 2018, a taxpayer can only claim an itemized deduction for state and local taxes of up to $10,000 for the aggregate of:

  1. state and local property taxes not paid or accrued in carrying on a trade or business, or other specified activity, and
  2.  state and local income tax paid or accrued in the taxable year.

This provision of the Act triggered many taxpayers, often on the advice of tax professionals, to prepay 2018 real estate tax obligations in the hope of claiming a deduction in 2017 for an expense that would otherwise be nondeductible if paid in 2018.  As detailed in a previous Our Thoughts On post, “Tax Reform and Payment of Taxes Prior to December 31, 2017,” the prepayment was likely to be disallowed.  The IRS eventually released an advisory notice on December 27 stating, “A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.”  In states such as Pennsylvania, which make most assessments after December 31, the prepayments would likely have been treated as nondeductible deposit against a tax and essentially would have amounted to an interest-free loan by the taxpayer to the municipality taxing the real estate.     

The Bill’s sponsors, two representatives from New Jersey, explain that the Bill would allow a deduction of 2018 property taxes, paid by December 31, 2107, regardless of whether the tax was actually assessed before 2018.  Rep. Leonard Lance, R-N.J. stated, “Taxpayers rightfully believe that the Tax Cuts and Jobs Act signed into law last month would allow 2018 property tax prepayments to be fully deductible on their 2017 tax returns.  It took the IRS five days after the bill passed and four days before the end of 2017 to issue guidance that would limit the deductibility based on the date of the property tax assessment.  Rep. Josh Gottheimer, D-N.J., added, “The IRS rushed a baseless decision to limit taxpayers' ability to deduct these payments on their 2017 returns.  This bill would reflect the will of Congress that these prepayments are and should remain fully deductible.”

Whether the proposal is only political posturing or has an actual chance of passing at this time is unknown.  Schneider Downs’ Tax Advisors will continue to monitor additional proposals, changes and technical corrections to the Act.  If you have questions, please contact us

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