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Planning to Prepay Property Taxes? The IRS Says Think Again

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The Internal Revenue Service released a statement Wednesday advising homeowners rushing to prepay their property taxes that the payments may not be tax deductible. The prepayments are a response to President Donald Trump’s tax overhaul set to take effect in 2018. The new law limits homeowners to a $10,000 max deduction for state and federal property taxes, combined.

Right now, in 2017, there is no limit on the deductions. Many homeowners, anxious about the new rule, have been prepaying in the last days of the year, hoping that those prepayments will be deductible. But the IRS is onto the scheme.

“In a notice on its website,” NBC News notes, “the IRS said that, in general, a full deduction for the prepayment of state or local property taxes depends on whether the taxpayer makes the payment this year and whether the property taxes are assessed prior to 2018.”

“The IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes,” the statement reads. “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.”

The key determining factor is this line: “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.” That’s a nice way of saying that most of the taxes for 2018 have yet to be assessed. In that case, prepayments won’t be deductible.

The $10,000 cap is seen by many as a slap in the face to states like California and New York. Both are massive Democratic strongholds and both assess high property taxes. Residents deducted those taxes, making payment less onerous.

“On Friday,” NBC notes, “New York Governor Andrew Cuomo issued an order allowing state residents to make either a partial or full pre-payment on their property tax bill prior to Jan. 1 in order to benefit from the federal tax deduction.”

Will that order be challenged?