Prepaying property taxes related to the current year but due the following year has been a popular and effective year-end tax-planning strategies. However, does it still make sense in 2018?
For some people, yes—hastening this expense will increase their itemized deductions, decreasing their tax bills. However, for many, mainly those in high-tax states, changes made by the Tax Cuts and Jobs Act (TCJA) eliminate the benefits.
What Did TCJA change?
The TCJA made two changes that affect the feasibility of this strategy. First, it placed a $10,000 cap on state and local tax (SALT) deductions, including property taxes plus income or sales taxes. Second, it virtually doubled the standard deduction to $24,000 for married couples filing jointly, $12,000 for married couples and singles filing separately and $18,000 for heads of household, so fewer taxpayers will itemize.
For property tax prepayment to make sense, two things need to happen:
It would be best if you itemized (that is, your itemized deductions need to surpass the standard deduction), and your other SALT expenses for the year need to be less than $10,000. If you do not itemize, or you have already used up your $10,000 limit (on income or sales taxes or previous property tax installments), accelerating your next property tax installment will offer no benefit.
John and Alice, a married couple filing jointly, have acquired $4,000 in charitable donations, $5,000 in state income taxes, $5,000 in property taxes, and $18,000 in qualified mortgage interest, for itemized deductions totaling $32,000. Their next installment of 2018 property taxes which is $5,000, is due in the spring of 2019. They have already reached the $10,000 SALT limit, so prepaying property taxes will not decrease their tax bill.
Now, if they live in a state with no income tax prepayment could potentially make sense since it would be within the SALT limit and would increase their 2018 itemized deductions.
Look before you leap.
Evaluate your situation carefully to be sure it will provide a tax benefit before you prepay property taxes. Also, just because prepayment will increase your 2018 itemized deductions, it does not exactly mean that is the best strategy. For instance, if you expect to be in a higher tax bracket in 2019, paying property taxes when due will likely produce a substantial benefit over the two-year period.
Contact us for help determining whether prepaying property taxes makes sense for you this year. We can also discuss other year-end tips for decreasing your taxes.
Ben R Shull CPA LLC provides clients with tax, transaction, and advisory services. The insights and quality services we deliver help lead our clients through the next generation of changes, and accelerate growth while reducing risk. CPA Katy, TX.