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Confusion reigns as people try to figure out property tax rules

Confusion is reigning in cities and suburbs with high property taxes as homeowners weigh prepaying their 2018 property taxes in order to avoid a bigger bill once the Trump cuts take effect.

Taxpayers worried that they’ll lose out because of a new $10,000 limit on state and local tax deductions, including property taxes, are scrambling to pay their 2018 property taxes in 2017 so that they can deduct the full amount before the tax changes go into effect.

Elected officials in places such as New York and Washington, D.C., have been highlighting the prepayment option. In some communities, long lines have formed outside of government offices so that people can prepay.

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But a number of people who have prepaid won’t actually benefit from doing so, and that number is only going up as a result of guidance the IRS issued late Wednesday.

“There’s probably more people that think this is good for them than is actually the case,” said  Ryan Ellis, a conservative tax-reform advocate who also is an enrolled agent certified by the IRS.

While the new tax law bars taxpayers from prepaying their state and local income taxes, it was silent on the issue of prepaying property taxes.

Wednesday’s IRS advisory states that prepaid property taxes are only deductible in some circumstances.

The agency said that the taxes can only be deducted on 2017 tax returns if the property taxes are assessed and paid before the end of the year. As a result, taxpayers who haven’t actually been billed by their hometown or county may not be able to deduct 2018 property taxes next year.

Several tax experts said that the guidance isn’t clear about what counts as an assessment.

“I don’t think this is the end of it. I think this will be an open topic and there will be some litigation,” said Nicole Kaeding, an economist at the Tax Foundation.

Others said they were surprised by the rigidity of the IRS’s position.

“They chose the most restrictive nit-picky way to look at this that is the least taxpayer-friendly way to look at this,” Ellis said.

Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, said that many experts had thought that payments would be deductible if the local government authorized the payment and the amount to be paid can be reasonably determined in good faith.

“I was surprised by the IRS position, which I thought was pretty aggressive,” he said.

Leah Robinson, who leads the state and local tax group for Mayer Brown, said that “even if you have to make the assessments, you could argue that the governors’ statements requiring localities to accept these payments are de-facto assessments.”

But Phil West, chair of Steptoe & Johnson, said he thinks the IRS’s guidance is “consistent with the law as I’ve interpreted it.” Instead, he found it surprising that state and local governments were announcing prepayment options and giving taxpayers the impression that any prepayments would be deductible.

“There was a rush on the part of the state and local governments to get prepayments,” he said.

Besides the restrictions imposed by the IRS’s Wednesday advisory, there are other reasons why taxpayers might also see no benefit from prepaying their property taxes.

Taxpayers only take the state and local tax deduction if they itemize, and only about 30 percent of taxpayers have itemized in recent years.

Additionally, the deduction is disallowed under the alternative minimum tax, a parallel tax system that is designed to prevent high-income households from paying too little in taxes, so taxpayers who already pay that tax wouldn’t benefit from prepayment. And taxpayers could trigger the alternative minimum tax if they have a deduction for state and local taxes on their 2017 tax returns that is much higher than their deduction the previous year.

The IRS guidance is affecting taxpayers in different jurisdictions in different ways — even within the same region.

For example, the D.C. government says that taxpayers should still be able to claim a deduction for prepaid property taxes because properties have been assessed and tax liabilities have been set. But in a number of counties in suburban Maryland and Virginia, 2018 property taxes won’t be assessed until after the new year.

The IRS notice may lead some taxpayers who prepaid before the guidance came out to seek refunds. At the same time, other taxpayers are likely to continue to prepay their property taxes following the release of the guidance.

Tim Firestine, chief administrative officer for Montgomery County, Md., said that taxpayers were still interested in prepaying on Thursday even after county officials showed them the IRS notice. Montgomery County won’t assess 2018 property taxes until July.

“People are still lined up, wanting to prepay,” he said.

The prepayment issue is one of many areas where the IRS will have to issue new guidance in the coming weeks and months as it implements the new tax law.

The agency is expected to issue new guidance on tax withholdings from paychecks next month, and it will have to update many forms before people file their 2018 taxes in 2019. Additionally, the IRS will have to issue regulations in a number of areas, particularly relating to the new law’s business tax changes.

Local government officials are advising their residents to talk to tax advisers before prepaying their property taxes.