Across the country, homeowners have been scrambling to ask, “Should I prepay my property taxes?” In light of the new tax laws that President Trump has signed into being, many are wondering if it is a wise move to prepay the taxes or wait.
According to the IRS, you may wish to wait before you pay your property taxes. The tax bill that was signed into effect sharply limits the itemized deductions that are allowed while it also raises the standard deductions for both couples as well as individuals.
This has led many homeowners, especially those who are in a higher tax bracket and in more affluent areas, to scramble to prepay their taxes before some of the deductions disappear. However, in the advisory notice that has been posted on the IRS website, while this may work well for some, it may only work well under certain limited circumstances.
In order for many of the deductions to work, the property taxes must be paid not only in 2017, they must also be fully assessed in 2017. Thus, if the homeowners are paying on the estimated assessments and attempting to pay for a few years in advance, it may not work out so well for them. All that has been achieved in many of these instances is that the homeowner is providing an interest-free loan to the government.
It’s unclear at this point in time, how many homeowners have attempted to prepay their taxes. Hundreds of people were lined up to prepay their property taxes in Fairfax, Virginia alone. There were other communities that have long lines of people just waiting to pay their taxes.
Many states are encouraging the residents to attempt to skirt the cap on the local and state tax deductions. Many are unsure of which route is best for them. It’s a conundrum to be sure. Will the homeowners save more money by prepaying? Or will they save more money by waiting?
The guidance from the IRS isn’t a legal decision, it’s merely a suggestion. In fact, the IRS didn’t define the meaning of what they meant by “tax assessed”. This may be the most important question. The property tax schedules will vary from one state to the next and even from one county to the next. Many states have sent out their tax assessment for 2018. If the payments aren’t yet due, most of the homeowners who are prepaying will be entitled to some deductions under the rules of 2017.
Still, other states have yet to start the assessment process for 2018. Prepaying in such areas won’t do any special favors to these homeowners, in fact, they may wind up missing out entirely on their best deductions if they prepay.
At present, it’s still uncertain how this will be treated by the IRS. It will be dependent on the particular state where the homeowners reside. In some instances, it may be something that they hope they can get back in court. There are many variables that must be considered.
It’s important that people are aware of the ramifications of prepayment if they’re not getting all of their deductions. It may fast become an administrative headache if it’s not kept track of. The IRS is scrambling to clarify the 2018 tax prepayment options and cautions taxpayers that some things may no longer be accepted as deductibles.
The prepayment of anticipated property taxes that haven’t been assessed before 2018, can’t be evaluated on the 2017 assessment. For those who are on the fence, or patiently waiting in those long lines to pay their taxes, there are some important things to keep in mind.
Alternative minimum tax or AMT is an alternative method of calculating the taxes to ensure that the taxpayers have paid out a minimum tax rate of the 26 percent to 28 percent that is required. They must pay the required minimum to keep them current. This will also be variable as they are working off of an assessment that may or may not be up to date.
States such as New York or New Jersey, where the taxes are higher, are more likely to own the AMT. This is due to the fact that they are disallowed in the state and local taxes. Prepaying the taxes won’t help to reduce the tax bill. The AMT will go up for each penny that it is reduced. It’s not truly a penny saved.
If the bill isn’t yet in your hand for the 2018 season, you’re not able to do the deductions yet as it hasn’t been assessed. It’s not going to do you any good in these situations either. According to the IRS, you can’t pay and deduct for 2017 if it hasn’t been assessed. Thus, it’s a bad financial move to even consider prepaying the taxes. They may be assessed far lower, or higher than what was paid and the money may not always be refundable.
You can’t even set up payments until the proper amount for 2018 has been established. You’ll have to have the cash on hand and if you overpay, good luck getting your overpayment back. Unfortunately, if you prepay now, you’ll also lose out on any interest that you may have earned on that money had you left it in an interest-bearing account while you waited for the property to be assessed. It’s like you just gave away the interest payment.
It may be far more beneficial to have this set aside in your emergency fund and earning interest than to spend it outright and not have it when you need it. Ensure that you’re leaving room for deductions and don’t jump the gun.
Remember too, you can deduct up to $10,000 in property taxes for 2018. Just make sure that you leave something for the next year. Don’t lose out and hope to get it back next year, it doesn’t work that way.
Always go over the idea with your Columbus Ohio tax attorney first. See what their take is on the option of prepaying vs waiting. Often, they can save you a ton of money if you just follow their instructions and wait for the right deductions. Also remember, prepaying the taxes won’t give you a leg up if you’re not saving money. Find out which route works the best for you and your household.