Deductions for prepaid property taxes

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Q. I have heard that New Jersey will not allow property tax paid in December 2017 — paid for the first two quarters of 2018 property taxes — to be included in a 2017 New Jersey tax return, unlike the IRS. Is this true?
— Homeowner

A. The coming changes for deducting property taxes will hurt a lot of New Jerseyans.

And it’s especially confusing if you tried to prepay your taxes to get a higher deduction on your 2017 return.

Here how it works.

For New Jersey personal income tax purposes, a homeowner is to report the real estate taxes billed for 2017 pertaining to their principal residence, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

“If a homeowner prepaid either their February 2018 or May 2018 real estate taxes in late 2017, those payments give rise to a federal income tax deduction for 2017, but for New Jersey, the deduction is to be claimed on the 2018 Form NJ-1040,” Becourtney said.

Becourtney offered this example. Imagine a taxpayer’s quarterly real estate taxes are $3,000. During 2017, this taxpayer paid all four 2017 quarterly payments plus the February and May 2018 payments for a total of $18,000.

“For federal purposes, the taxpayer will claim a real estate tax deduction of $18,000 on their 2017 federal Form 1040,” Becourtney said. “For New Jersey purposes the taxpayer will claim a real estate tax deduction of $10,000 — the maximum allowed — on their 2017 Form NJ-1040 based on $12,000 of real estate taxes billed for 2017.”

For 2018, Becourtney said, this same taxpayer will report a 2018 federal deduction of $6,000 and a New Jersey deduction of $10,000 based on $12,000 of assessed real estate taxes for 2018, assuming this taxpayer makes both the August and November 2018 tax payments later this year.

He said if annual real estate taxes are below $20,000, the New Jersey treatment benefits homeowners who prepaid 2018 real estate taxes because if New Jersey followed the federal treatment, then the 2018 deduction would be below $10,000 because of the prepayment of tax.

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