IRS warns taxpayers that prepaying property taxes might not work

The IRS is warning taxpayers in new guidance issued Wednesday that they might not be able to deduct their prepaid 2018 property taxes on their 2017 returns.

Taxpayers expecting their bills to rise because of the new tax law’s restrictions on deductions for local, state and property taxes have reportedly rushed to prepay taxes for 2018, hoping to do so before the new law takes effect.

But in an advisory issued late Wednesday, the agency said that the prepaid taxes are only deductible if the property taxes are both assessed and paid in 2017.

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This means that if a local assessment office hasn’t determined a home’s property tax assessment for the next tax year, it won’t be possible to deduct prepaid taxes on the property.

“The IRS guidance issued today means that many individuals who prepaid might not benefit,” Nicole Kaeding, an economist at the Tax Foundation, said in a blog post on the group's website.

“According to the guidance, an individual’s property tax liability must be paid in 2017 to be deductible, but it must also be assessed,” she said. “Estimating your property tax liability isn’t enough. The property tax must be billed too.”

Under the new law, the state and local tax deduction, including property taxes, will be capped at $10,000 beginning in the 2018 tax year. That cap does not apply to the 2017 tax returns that people will file this spring.

As a result, jurisdictions in areas such as New York and the Washington, D.C., region have been encouraging their residents to prepay their property taxes so that they can deduct more of them.

Taxpayers in some areas have been lining up at local government offices to prepay their taxes. But the IRS guidance signals that some taxpayers who have done so won't get to deduct that amount when they file their taxes this spring.

Kaeding in her post added that “tax attorneys are on Twitter arguing over what a property tax assessment must contain and whether localities could issue them in the few remaining days of the tax year, so we haven’t heard the last on this issue.”