Tax Cuts and Jobs Act Enacted December 22, 2017 – You May Need To Act Quickly
Dear Client,
As you may be aware, the Tax Cuts and Jobs Act (TCJA) was enacted into law on December 22, 2017.
This is the most comprehensive tax reform bill in over 30 years and it will impact many facets of your tax burden for the foreseeable future.
Unfortunately, the timing of the bill’s passage leaves little time to take advantage of the existing rules in 2017 that will change in a few days.
As there isn’t enough time to review each client’s situation in detail and provide tailored, accurate recommendations before 2017 ends, I am posting this information to explain one of the key provisions that may affect you.
In 2017 and prior years, you were able to deduct all real estate taxes and state and local income taxes paid as an itemized deduction. Limitations applied, but that was the basic concept.
In 2018, under the TCJA, these deductions will be capped at $10,000 per year.
However, the standard deduction is being increased substantially.
Therefore, if you meet the following criteria, you may benefit from paying your real estate taxes that are normally paid in 2018 in 2017:
- You historically itemized deductions and one of your deductions are real estate taxes on your primary residence, and/or
- Your historic itemized deductions total less than the new 2018 standard deduction, and
- You are not subject to Alternative Minimum Tax, and
- You may live in a county that assesses their real estate tax before January 1, 2018 (Franklin county, Ohio assesses tax in December 2017, thus Franklin County taxes are available for this ‘prepayment’).
The benefit to this strategy is that you will obtain a deduction in 2017 for an expense that you will not be able to deduct in 2018 when it would normally be paid.
The tax savings can vary substantially from taxpayer to taxpayer depending on your circumstances.
If you make the real estate tax prepayment, you may benefit from it, but I wouldn’t necessarily expect it to radically change your 2017 tax picture.
If your real estate taxes are paid from an escrow account with your lender, you should contact your bank at your earliest convenience after making your payment to discuss how to handle the excess cash that will be in your escrow account.
Franklin County, Ohio real estate taxes can be paid here:
https://www.paydici.com/franklin-county-oh/search/new
As long as payments are made in 2017, they are a 2017 deduction.
If you would like to take advantage of these potential savings, I recommend paying as soon as possible but no later than 12/31/17.
If you reside in a county other than Franklin, Ohio, I recommend checking the county treasurer’s website in your resident county to determine if their taxes are assessed in 2017 or in 2018.
If taxes are assessed in 2017, prepayment of the 2018 bills will provide the 2017 tax deduction described above.
If tax is assessed in 2018, then prepaying will not provide a tax deduction.
The IRS recently issued this “special edition” of a newsletter regarding the issue of real estate tax assessment:
IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017
The Internal Revenue Service advised tax professionals and taxpayers today that pre-paying 2018 state and local real property taxes in 2017 may be tax deductible under certain circumstances.
The IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes. In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.
The following examples illustrate these points.
Example 1: Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017 – June 30, 2018. On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.
Example 2: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018. County B intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.
Charitable contributions may be of more benefit to you in 2017 than in 2018 as well.
A good resource regarding the required documentation for charitable contributions can be found here.
