Dec 29

Is a Federal Income Tax Deduction Available for 2018 Real Property Taxes Paid Before December 31, 2017?

Under the Tax Cuts and Jobs Act the standard deduction has been doubled to $12,000 for single individuals and married individuals who file separately and to $24,000 for married couples who file jointly.  As a result, many individuals who will itemize on their 2017 federal income tax returns may not itemize on their 2018 income tax returns.  Those taxpayers are encouraged to accelerate the payment of deductible expenses before December 31, 2017 and many taxpayers are scrambling to pay their real property taxes.

Many counties and townships are not accepting the payment in 2017 of 2018 real property taxes so for taxpayers who live in those counties and townships the 2017 itemized deduction is lost.  In addition, though, on December 27, 2017 the IRS issued Advisory 2017-210 in which the IRS states that real property taxes may only be deducted if (i) paid by December 31, 2017; and (ii) assessed in 2017.

State or local law determines when real property tax is assessed and generally real property tax is deemed assessed when it becomes due.  The Advisory provide two examples.

In the first example the county assesses its real property tax on July 1st of every year and sends its bills for the tax on July 1st of every year and the bill covers the fiscal period beginning July 1st of the year in which the bill is sent and ending June 30th of the next calendar year.  For the period July 1, 2017 through June 30, 2018, the county requires that the tax be paid in two installments, the first due September 30, 2017 and the second due January 30, 2018.  Under the Advisory, a payment of the second installment on or before December 31, 2017 will be deductible on the taxpayer’s 2017 federal income tax return.

Under the second example, a payment before December 31, 2017 for the county’s fiscal year June 1, 2018 through June 30, 2019 will not be deductible on the taxpayer’s 2017 federal income tax return because the real property tax was not assessed prior to January 1, 2018.

Before you rush to the tax assessor’s office or the post office to advance-pay your real property tax, make sure that the assessor will accept your payment and that the tax you are paying has been assessed.  Otherwise, you will be making an interest-free loan to your township or county.

You may encounter another bump in the road if your realty property taxes are paid by a mortgage company or bank and you prepay the taxes yourself.  In that event, you will have to make sure that the mortgage company does not again pay the same tax in 2018 which will have to be refunded.  In addition, the amount held in escrow by the mortgage company will not be reduced by the amount of tax you pay yourself, so you, if you prepay the real property tax, you might also be making an interest-free loan to your mortgage company.

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