Lawmakers Push IRS to Allow Prepaid 2018 Property Taxes

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By Leslie A. Pappas and Allyson Versprille

State residents who rushed to prepay their 2018 property taxes before the end of the year deserve a deduction from the federal government, New York and New Jersey lawmakers told the IRS Jan. 9.

In a letter to Acting Commissioner David J. Kautter, a coalition of nine Democratic U.S. lawmakers from New Jersey asked the agency to rescind recent guidance (IR-2017-210) that would prevent state taxpayers from deducting 2018 property taxes paid in 2017. The guidance, issued Dec. 27, says that only property taxes assessed before 2018 will be deductible in 2017.

“Changing the rules in the middle of the game is both harmful and unfair to middle class families struggling to understand this new complex tax law being imposed on them virtually overnight,” the lawmakers said. “We urge you to immediately reverse course and give the people of New Jersey the certainty and fairness they deserve.”

The letter is just one example of state lawmakers pushing back on the new federal tax act ( Pub. L. No. 115-97). The law allows taxpayers to deduct up to $10,000 of property taxes, and state and local income or sales taxes. The previous law placed no limit on the amount of state and local taxes that could be deducted.

Many states had allowed residents to rush and prepay 2018 property taxes before Dec. 31 to try and circumvent the new cap.

‘Double Taxation’

In a separate letter Jan. 9, Rep. Leonard Lance (R-N.J.) asked the IRS to revisit the advisory, saying the IRS and state governments “should work in comity on these matters.”

New Jersey is a high tax state with some of the highest property taxes in the nation, and is among a group of similar states like California, New York, and Illinois pushing back against the federal tax act.

Governor-elect Phil Murphy (D) said Jan. 5 that he’s working on a plan that would effectively convert property taxes into charitable gifts. Murphy joins New York Governor Andrew Cuomo and California Senate President Pro Tem Kevin de León, who have also said they’re considering ways to shield their constituents from the new federal tax act.

As many as 1.8 million taxpayers in New Jersey, or more than 40 percent of the state’s residents, are facing double taxation as a result of the federal cap on deduction of state and local taxes, the coalition’s letter said.

Outgoing Gov. Chris Christie (R) issued an executive order Dec. 22 ordering all local municipalities to accept 2018 property tax payment in 2017 if the payments were postmarked on or before Dec. 31.

S&P Global Ratings said the “rush of people” accelerating 2018 tax payments into calendar year 2017 is causing “forecasting uncertainty,” potentially causing a large temporary increase in December 2017 and January 2018 monthly tax collections in the state.

“It might take time” to determine what part of increased revenue is of one-time versus ongoing nature, according to S&P.

Relief for ‘Donor States’

New Jersey lawmakers aren’t the only ones appealing to the IRS for relief.

Rep. Nita Lowey (D-N.Y.) also wrote a letter to Kautter Jan. 9 expressing concern with the IRS guidance and asking the agency to allow taxpayers to deduct prepayments of their state and local taxes.

The IRS guidance makes it unclear whether New Yorkers who pulled together their property taxes during the holidays will be allowed to deduct those payments, she wrote.

New York sent $48 billion more in taxes to the federal government in fiscal year 2015 than it received in federal funds. “The federal government must find tax relief, not additional burdens, for taxpayers from donor states,” she wrote.

Push to Restore SALT

Meanwhile, Lowey and Rep. Peter King (R-N.Y.) are cosponsoring legislation to restore the state and local tax deduction in its entirety, claiming that the new cap unfairly disadvantages taxpayers in high-tax states like New York, New Jersey, and California.

King on a Jan. 9 call with reporters said it’s unlikely that the Securing Access to Lower Taxes by Ensuring Deductibility Act—or the SALT Deductibility Act for short—will garner enough support in the near term to come to a vote on the House floor. However, it’s important to keep the debate alive because “when a time comes when they have to get our votes,” this issue could be used as leverage, he said.

Restoring the SALT deduction could also gain more traction in the long term if GOP lawmakers in high-tax states who voted for the new tax law “start to feel the heat” from their constituents, King said.

The revenue that would be lost by restoring the unlimited SALT deduction “can be made up other ways,” such as through changes to corporate taxes or carried interest, King said. The members who crafted the new law “never tried, really,” he said.

With assistance from Katherine Tam in New York (Bloomberg)

To contact the reporters on this story: Leslie A. Pappas in Philadelphia at lpappas@bloomberglaw.com and Allyson Versprille in Washington at aversprille@bloombergtax.com (Bloomberg Tax)

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

For More Information

Text of the IRS guidance is at http://src.bna.com/vvM.

Text of the coalition's letter is at http://src.bna.com/vvB.

Text of Lance's letter is at http://src.bna.com/vvU.

Text of Lowey's letter is at http://src.bna.com/vvH.

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