Understanding property tax prepayment

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** Addition on Dec. 27: Despite Gov. Christie’s executive order requiring that municipalities in New Jersey allow homeowners to prepay 2018 property taxes (as long as the payments are postmarked by the end of the year, which is Sunday), the IRS has issued guidance that only taxes that have been assessed by municipalities may be prepaid and deducted for 2017. Tax experts are still debating whether that means you can only deduct prepaid taxes that have been billed. Stay tuned for more. 

Q. Because of the new tax bill, should we prepay our February property tax? Is that $10,000 limit for the house, individual or couple?
— Tax weary

A. We’re glad you’re asking before the year ends.

It’s also not an easy answer for many taxpayers.

Under the new tax bill, deductions for property tax payments and other so-called SALT deductions will be limited to $10,000. That’s a big ouch for the pocketbooks of New Jerseyans and others in high-tax states.

The decision to prepay your Feb. 1, 2018 real estate tax bill by the end of December is predicated on whether you are subject to the Alternative Minimum Tax (AMT) for 2017, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

“If you are subject to the AMT, then any additional real estate taxes paid will not reduce your federal income tax at all as for AMT purposes, real estate taxes are not allowed,” Becourtney said.

He said the additional real estate tax payment will lower your regular tax, but the AMT liability will be unchanged — thus your tax liability will be unchanged as you pay the higher of the regular tax or the AMT.

The AMT is quite complex, Becourtney said.

If you were subject to the AMT for 2016 and your overall income and deductions are comparable for 2017, you are probably going to be to AMT again, he said.

“If your deduction for state and local income taxes plus real estate taxes — commonly referred to of late as the `SALT’ deduction — will exceed $10,000 for 2018 even with you prepaying the Feb. 1 tax bill in December, then you have nothing to lose by doing so as the deduction will otherwise be wasted,” he said.

He said you can use the same rationale for your May 1, 2018 real estate tax bill, assuming you have it in your possession.

“Presumably you are not paying your real estate taxes via mortgage escrow as in that situation the lender controls the payment and you would be unable to accelerate 2018 real estate tax bills into this month,” he said.

Now to your question about who gets the $10,000 deduction limit we will see next year.

Becourtney said there is no limit on the amount of real estate taxes one can deduct for 2017.

“If you own five houses you can deduct all real estate taxes paid in 2017 on the five houses,” he said. “If you own a home with a non-spouse — unmarried couple, two brothers, etc.— and share the tax payments 50/50 then you would only deduct your share.”

And, Becourtney said, If there is a rental property involved, the real estate taxes on the rental property will not be subject to the new $10,000 SALT deduction limit.

Email your questions to moc.p1537607242leHye1537607242noMJN1537607242@ksA1537607242.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.