Under a new law enacted as part of the Tax Cuts and Jobs Act of 2017, effective January 1, 2018, individuals’ combined federal income tax deduction for state and local income, sales, and property taxes is limited to $10,000. For 2017, the combined deduction is not subject to the $10,000 limitation, so a taxpayer might be inclined to pre-pay 2018 state and local taxes in 2017 to maximize the deductible amount and, potentially, to use the deduction to offset income that will be taxed at 2017’s higher marginal rates.
Unfortunately, the IRS recently announced that it will take the position that a taxpayer may claim a deduction for prepaid real property taxes only if the taxes have been assessed in 2017. In general, assessment occurs when the taxpayer is liable for the property tax imposed.
In the view of the IRS, even if a local County were to accept 2017 prepayments of unassessed 2018 property taxes, a taxpayer would not be allowed to deduct the prepaid amount because it was not yet owed to the local government. Whether the IRS position will be sustained by the courts remains to be seen, as the relevant statute refers to real property taxes “paid or accrued.”
Taxpayers and their return preparers should check local law to determine whether 2018 property taxes have been assessed in 2017. If not, taxpayers should exercise caution in deducting 2018 real property taxes prepaid in 2017 and should consider disclosing the issue on their 2017 federal income tax returns to avoid penalties.
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