Ever since the GOP tax bill was passed, state and local governments are scrambling between Christmas and New Year's Day to issue guidance to their residents who now may see their deductions affected because of the new law going into effect Jan. 1.
The issue: The tax bill caps the deductibility of state and local taxes at $10,000 per family. That includes both state and local income taxes and property tax. The bill explicitly forbade deductions for prepaying state-and-local income tax this December in order to get a deduction in April that wouldn't be available a year later. The more complicated issue of prepaid property tax was not addressed by the bill.
The Internal Revenue Service announced on Wednesday that pre-paying 2018 state and local property taxes in 2017 would be tax deductible "under certain circumstances." If the real property taxes are assessed prior to 2018, then taxpayers will be allowed to deduct the prepayment of their state or local real property taxes from their 2017 taxes.
This sent Americans living in affluent, highly-taxed Democratic-leaning states into a tailspin.
The Washington Post reported that over 1,700 property owners in Fairfax County, Virginia lined up at their local government center to prepay their property taxes. Hundreds of others sent in wire transfers, and others dropped off their prepayments in a government lockbox.
Local governments in Montgomery and Prince George's Counties in Maryland held emergency sessions, breaking their winter recess, to pass laws authorizing the prepayment of 2018 property taxes. Govs. Andrew Cuomo, D-N.Y., and Chris Christie, R-N.J., issued executive orders in their respective states for local governments to do the same.
However, there are two problems with prepaying your property taxes.
First, if your property has not been assessed by your local or regional government, the IRS won't allow you to deduct any prepayment of 2018 property taxes on your 2017 taxes (the taxes you will file in three months).
Secondly, even if the IRS does allow the prepayment, you still may get no tax benefit due to current law. That is, if you're subject to the alternative minimum tax, paying extra property taxes in 2017 won't make a lick of difference. The AMT, which affects couples making over $187,800 and individuals over $93,900, disallows state and local tax deductions. In other words, a lot of the people trying to get in one last taste of the SALT deduction weren't getting the SALT deduction anyway, thanks to the AMT.
Of course, many property owners with high property taxes don't pay the AMT, and so shifting their property tax payments to 2017 could save money (if the IRS allows the deduction). If not, you're just giving your county or state government months early and leaving your rainy day fund lower than it would be.