Should you Pre-pay Your 2018 Property Taxes to Save Money

As most people have heard, there are big tax changes coming in 2018.  Here's a brief overview of the changes that affect property taxes.  Be advised, I'm not a licensed accountant, or tax advisor, and everyone's tax situation is different.  However, I am getting questions on this, so I'm writing the post. 

There's a "Cap" on property taxes that you can deduct off your income, and it's 10,000.  

In years past, you could deduct your property taxes off your income.  So if you earned 100,000, and paid property taxes of 12,000, the IRS would consider your income to be just 88,000, and tax you on that.   Being taxed by the Federal Government on a lower number is generally better.  Property taxes in Massachusetts are relatively high, and as such this was a very important deduction for many people.  Under the new law, the IRS will only allow you to deduct the first 10,000 in property taxes, so in our example the IRS will now consider your income to be 90,000, so you'll have to pay taxes on another $2000 of income.  (Not $2000 more in taxes, but your income goes up). If your tax bracket is 25%, then you'll owe another $500 in taxes based on these variables. 

What Some are Doing

If you have property taxes over 10,000 per year, you could, theoretically, pay 2018 taxes in year 2017 (that's right now!), and claim the full deduction this year.  In our example above, you could pre-pay $2000, and then you won't exceed the 10K cap next year.  So you'll get the full $2000 credit this year.

Is this Legal?

Ah, well, nobody knows that yet.  There are problems with it.  Recently, the IRS has said that you can only pre-pay your taxes IF they have been assessed already.  Most towns in Massachusetts don't assess you for the full year in 2017, so clearly there are going to be limiting factors here. If you want to find out out how much of your 2018 property tax bill is already assessed, and if you can pre-pay it, you'll need to call your town assessor. It is likely that their could be challenges to the law also, since the people that will be affected have deep pockets, and they tend to take stuff like this to court. Bottom line, I don't think anyone knows how legal or illegal things are at this point.  You should be aware that pre-paying doesn't prevent the IRS or Congress from creating new rules or laws that make your actions fruitless.

Should You Do This?

Again, this is not official tax advice, but generally:

1) If your property taxes are under 10,000 per year, there is likely no benefit to pre-paying your taxes, based on what we know today.  You'll still get your full deduction next year.  Pre-paying has an economic cost to it, so generally it would be unhelpful.

2) If your property taxes are significantly over 10,000, you should call your tax advisor and the town assessor and see what your options are.  It may make sense, but how much it saves you will depend on how much of your 2018 taxes are already assessed in 2017.