With the tax reform bill now the law of the land, clients have been asking us whether prepaying some or all of their 2018 property taxes and state income taxes by December 31, 2017 is the right tax-planning move to make... and, more importantly, will it work?
Be aware that the new provisions in this area apply only to property taxes on personal property and personal state income tax, but not to such taxes paid on business property, such as rental real estate.
The IRS yesterday issued an advisory notice to help answer questions about whether it might accept prepayment as a tax strategy. You can read the agency's 430-word notice here.
The bottom line
: if you've already been assessed for any 2018 property taxes, then prepayment of those taxes before December 31 will more than likely be allowed as a deduction on your 2017 tax return. Conversely, prepayment of anticipated property taxes that have not been assessed prior to 2018 will not be deductible in 2017.
Note that state income taxes due on 2017 income and paid before December 31 will be deductible on this year's return. As with the pre-Trump tax law, the effectiveness of deducting both property tax and state income tax are limited, perhaps severely, if you are subject to the Alternative Minimum Tax.
: if you've been assessed for 2018 property taxes and have the resources to do so, then prepay them. Depending on your particular tax situation (including your status under AMT) and subsequent IRS rulings as the issue unfolds, prepaying won't necessarily guarantee that you will be allowed the deduction... only that you are preserving the chance to declare it.
For more perspective on the matter, including a helpful recap of the tax reform provisions that triggered taxpayer questions about the treatment of 2018 property taxes, see this article published yesterday in the New York Times.