Accelerating your property tax payment into the next tax year

Accelerating your property tax payment into the next tax year

Accelerating your property tax deduction, and other deductible expenses, into the current year typically is a good idea. Why? It will defer tax, which usually is beneficial. Prepaying the tax may be especially beneficial this year, because proposed tax legislation might reduce or eliminate the benefit of the tax deduction.

Proposed changes

The initial version of the House tax bill would cap the property tax deduction for individuals at $10,000. The initial version of the Senate tax bill would eliminate the property tax deduction for individuals altogether.

In addition, tax rates under both bills would go down for many taxpayers, making deductions less valuable. And because the standard deduction would increase significantly under both bills, some taxpayers might no longer benefit from itemizing deductions.

Year-end planning

You can prepay (by December 31) property taxes that relate to the current tax year but that are due in the subsequent tax year and deduct the payment on your current tax return. But you generally can’t prepay tax that relates to the following tax year and deduct the payment on your current tax return.

accelerating your property tax payment will in most cases be beneficial if the tax deduction is eliminated beginning in next year. But even if the tax deduction is retained, prepaying could still be beneficial. Here’s why:

  • If your property tax bill is very large, prepaying is likely a good idea in case the property tax deduction is capped beginning in next year.
  • If you could be subject to a lower tax rate in next year or won’t have enough itemized deductions overall in the next year to exceed a higher standard deduction, prepaying is also likely tax-smart because a property tax deduction next year would have less or no benefit.

However, there are a few caveats:

  • If you’re subject to the AMT in the current year, you won’t get any benefit from prepaying your property tax. And if the tax deduction is retained for the next year, the prepayment could cost you a tax-saving opportunity next year.
  • If your income is high enough that the income-based itemized deduction reduction applies to you, the tax benefit of a prepayment may be reduced.
  • While the initial versions of both the House and Senate bills generally lower tax rates, some taxpayers might still end up being subject to higher tax rates in following year, either because of tax law changes or simply because their income goes up next year. If you’re among them and the property tax deduction is retained, you may save more tax by holding off on paying property tax until it’s due next year.

It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. We can help you make the best decision based on tax law change developments and your specific situation.

© 2017 Ben R Shull CPA LLC