22 Dec Answers on property tax prepayment

** 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. I am looking for clarification concerning prepayment of property taxes. Given the changes to the tax code, relative to SALT deductions, can I prepay my third and fourth quarter property taxes due in 2018 and deduct them from my 2017 tax return?
— Trying to save

A. This is a huge issue for many New Jerseyans.

Let’s take a deep look.

Most individual taxpayers follow the cash receipts and cash disbursement basis rules, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

This means income is income in the year you receive or are entitled to receive the income, he said.

By the same token, expenses are expenses in the year you pay the expense. You can make the payment in cash, by check or by credit card, he said.

“So in order to deduct a tax payment, you must actually pay it,” he said. “If you pay your real estate taxes to the bank as part of your mortgage payment, you can only deduct the amount the bank actually disbursed to the town.”

When you make the payment to the bank, the bank is acting as your agent. It is holding your money, Kiely said. When the bank makes the payment, it is as if you are making the payment to the town yourself.

Another requirement to deduct state or local taxes is the tax liability must be yours, Kiely said.

“If you paid my property tax, I am happy and the town is happy, but I can’t deduct the payment because I didn’t make the payment,” he said. “You can’t deduct the payment you made because the liability wasn’t yours.”

Deductible real estate taxes are any state, local or foreign taxes on real property levied for the general public welfare, Kiely said.

“You can deduct these taxes only if they are assessed uniformly against all property under the jurisdiction of the taxing authority,” he said. “The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you.”

Kiely said if for some reason you did not make any real estate tax payments to your town in 2016, you weren’t able to take a deduction because you didn’t make the payments even though they were due. If in 2017 you paid the past due 2016 real estate tax plus 2017’s payments, then you can deduct both years taxes on your 2017 income tax return, he said.

So what about paying the first two quarters of 2018’s real estate taxes in advance in 2017?

“If you pay 2018’s taxes, you passed the cash disbursement rule,” Kiely said. “The first two quarters of real estate taxes have been assessed by the taxing authority.”

But they aren’t yet due, he said, and the IRS is silent on the topic. Kiely said he’d go ahead and make the payments and take the deduction.

One final thought is look out for the Alternative Minimum Tax.

“State and local tax deductions are AMT tax preference items,” he said. “You might save on income taxes but, you might wind up paying some or all of the savings back as Alternative Minimum tax.”

Email your questions to .

This post was first published in December 2017.