Wealthy homeowners are trying to escape one part of the new Trump Tax by prepaying their 2018 property taxes and applying those payments to their 2017 deductions. The Trump Tax will cap the amount of state and local taxes we can deduct at $10,000.
But last night, the Internal Revenue Service threw another wrench in those wealthy folks’ effort to minimize their Trump Tax. In its latest advisory, the IRS says taxpayers can only deduct 2018 property taxes on their 2017 return if their local jurisdictions have officially assessed those 2018 taxes:
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 [Internal Revenue Service, Advisory IR-2017-210, 2017.12.27].
The Trump cap on SALT deductions won’t affect typical South Dakotans. If you’re making $100,000 a year and living in a $400,000 house, your property tax in Brown County is maybe $5,600. The IRS calculates your sales tax deduction to be $1,440, but conceivably, if you bought $50K worth of stuff over the year and kept your receipts, you could establish that you paid $3,250 in sales tax. But those property tax and sales tax estimates still don’t reach the Trump threshold. The state and local tax deduction cap is meant to punish people in progressive states that didn’t vote for Trump. Last night’s IRS advisory makes sure that punishment affects more people.