To Pre-pay or Not To Pre-Pay

Questions linger in regards to Year-End Tax planning post passage of GOP Tax Bill…

With the passage of the GOP Tax Bill, many questions are lingering about the impact to taxpayers heading into the New Year. The clock is ticking to make sure taxpayers take advantage of any opportunities to maximize deductions on their 2017 tax returns before those deductions disappear in 2018. As we explained when the bill passed, there have been a large number of last minute provisions which have made it very complicated to determine the best strategy for year-end tax planning in light of the new tax bill.

One of the largest sources of confusion stems from the elimination of most itemized deductions in the new legislation. Originally it seemed logical that the most efficient way to maximize 2017 returns would be to prepay 2018 deductions, such as real estate and property taxes, state and local income taxes and charitable contributions in 2017, and then take those deductions in 2017 before they were eliminated moving forward. Last minute provisions to the Tax Bill began chipping away at these opportunities though, first by removing the eligibility for state and local income taxes to be deductible through prepayment, and then continuing to muddy the waters as to what, if anything, is actually eligible for deduction through prepayment.

The IRS just released an Advisory specifically in regards to prepayment of State and Local Real Estate Taxes, which essentially states that SOME 2018 property taxes assessed and paid in 2017 MAY be deductible, but the amount needs to be determinable. The advisory states:

The Internal Revenue Service advised tax professionals and taxpayers today that pre-paying 2018 state and local real property taxes in 2017 may be tax deductible under certain circumstances.

The IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes. 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 following examples illustrate these points.

Example 1: Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017 – June 30, 2018.  On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018.   Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.

Example 2: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018. County B intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019.  However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year.  Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.

The IRS reminds taxpayers that a number of provisions remain available this week that could affect 2017 tax bills. Time remains to make charitable donations. See IR-17-191 for more information. The deadline to make contributions for individual retirement accounts – which can be used by some taxpayers on 2017 tax returns – is the April 2018 tax deadline.

 

Still confused? You aren’t alone. Due to the steady stream of provisions still surfacing in regards to the Tax legislation, the criteria for eligibility, and the subsequent recommendations we would make as a result, keep changing. The recommendations that we made prior to the passage of the Tax Bill, had changed a great deal by the time the bill passed, and continue to change, due to the fluid nature of this process.

So what should you do?

Don’t do anything without speaking to your Financial Advisor or Tax Professional. At this time there is no hard and fast rule as to the best year-end tax strategy, it’s very much a case by case situation. The strategy that makes the most sense for your neighbor, may not apply to you. With that in mind, make a list of the questions you have and reach out to your financial professional. There may be opportunities to maximize the deductions you take on this year’s return, but there’s no guarantee. Our team is working diligently to stay up to date on the impact of the new legislation and ongoing provisions in order to best advise all of you who count on us. We will continue to provide guidance and commentary when appropriate on these topics as we enter tax season.

By | 2018-01-25T11:58:10+00:00 January 2nd, 2018|The Blog @JGUA|