Property Tax Post: Prepayment Issue Far From Settled


The last few weeks of 2017 saw a flurry of taxpayers rushing to prepay their 2018 property taxes. This came in reaction to the tax reform bill passed on Dec. 22, 2017, which capped the SALT deduction, or the deduction to $10,000 beginning in 2018 for state and local income, sales, and property taxes. Pub. L. No. 115-97 barred the deductibility of prepaid 2018 state income taxes, but made no mention of a similar rule for property taxes, leading many to believe that 2018 property taxes paid before the end of the year would be deductible on 2017 tax returns.

However, as individuals attempted to get their 2018 property taxes in before Dec. 31, 2017, the IRS issued guidance that brought the deductibility of these prepayments into doubt—only deductions for property taxes that had been both assessed and paid prior to the new year would be allowed. By the time this guidance, IR-2017-210, was issued on Dec. 27, 2017, many taxpayers had already made 2018 prepayments. To complicate matters, some jurisdictions are not allowing refunds of the prepaid taxes until property tax statements go out later this year.

This situation has led lawmakers from several high-tax states to urge the IRS to rescind its guidance on the matter. Nine congressional representatives from New Jersey sent a letter to Acting Commissioner David Kautter, stating that the guidance is “nothing but a backdoor attempt to retroactively implement the cap on state and local deductions.” Sen. Chuck Schumer (D-N.Y.) released a statement calling on the agency to “‘do the right thing’” by allowing prepaid property taxes to be deducted on 2017 returns.

Despite the outcry, Treasury Secretary Steven Mnuchin has indicated that the IRS intends to hold firm in its position against allowing the deduction for unassessed taxes. As reported by Bloomberg Tax’s Laura Davidson (subscription required), Mnuchin has stated that returns with property tax prepayments will be thoroughly audited to ensure compliance with IR-2017-210. He emphasized his position later, saying the intent of the guidance “‘was that it wouldn't allow taxpayers to abuse the system.’” Mnuchin’s hard line on the issue makes it seem unlikely that the IRS will budge.

In the meantime, states are exploring other ways to cushion the blow from the cap on the SALT deduction for their residents. New York, New Jersey, and Connecticut announced their intention to sue the federal government, alleging that the cap violates the Constitution. On Feb. 2, 2018, Maryland’s Attorney General, Brian Frosh, declared that the state would join in the suit. California is taking a different approach and is pursuing legislation that would allow residents to claim their state tax liabilities as charitable contributions for federal income tax purposes.

Exactly how the issues surrounding property tax prepayments and the SALT deduction shake out remains to be seen. One thing is certain, however: the fight over implementing tax reform is far from over.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should the IRS allow taxpayers to deduct prepaid property taxes on their 2017 tax returns? Are states efforts to fight back against the new limits on the SALT deduction likely to be effective?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and the impending changes, with pertinent cites attached.

Get a free trial to Bloomberg BNA Tax & Accounting's State Tax solution, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.