Pre-Pay Property Taxes in 2017?

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FootballFan5548
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Pre-Pay Property Taxes in 2017?

Post by FootballFan5548 » Tue Dec 05, 2017 11:22 am

I'm 34, Married file jointly with two kids. My wife is a SAHM. We live in a very HCOL, with very high property taxes (NJ).

2017 will be my largest earning year ever due to my company getting acquired and a large one time payout on RSU's and company stock options. Let's say in a typical year my gross pay is in the $250k range, in 2017 it will be over $500k. The major uptick in compensation is a result of immediate vesting and LTCG from my company stock that I held. There are obviously significant taxes that go along with this event.

My property tax is roughly $20k per year $5k/quarter, and I deduct that from total taxes each year. Would it be a smart move to pre-pay the first 2 quarters of 2018 taxes in this year to try and offset some of the tax bill due? Has anyone ever done this before? I'm expecting next year my total pay will come back down into the normal range. There is also the threat of the tax reform bill reducing the total amount you can deduct to $10K on property taxes no matter what, although I'm not sure when/if that would go into effect.

Would pre-paying an extra $10k in property taxes for the 2018 year in the end of 2017 help offset some of the LTCG tax I owe, and is this even allowed?

Thanks

ivk5
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Re: Pre-Pay Property Taxes in 2017?

Post by ivk5 » Tue Dec 05, 2017 11:29 am

Sounds like you may be in AMT this year, in which case no benefit from prepaying. Fill out a pro forma return or plug your numbers into software to verify.

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CAsage
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Re: Pre-Pay Property Taxes in 2017?

Post by CAsage » Tue Dec 05, 2017 11:30 am

In California, we get billed annually with two payments, one due in October and one due in February. It is quite possible to pay last years February and both new Oct & Feb in one year (i.e.1.5 years worth) and the next year pay just the October (.5 years worth) but not double up. From prior posts on this subject, it is VERY state and local dependent; as in whether you have the bill in hand or whether your local tax authority will accept it. Lots of them seem not to... If you have the bill, quite legal.

Also, some states (including the glorious Sunshine State of CA) allow one to prepay state estimated income taxes, and I did that online as well. Watch out for AMT; if you are going to prepay taxes you really need to model it well in tax software (taxcaster or Taxcut or similar).

(delete the part speculating on future tax proposals, not permitted to discuss that).
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

Nate79
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Re: Pre-Pay Property Taxes in 2017?

Post by Nate79 » Tue Dec 05, 2017 11:34 am

As long as you have an actual assessed bill then you are free to pay ahead of time. You can not pay estimates, non assessed values and deduct.

Smilodon
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Re: Pre-Pay Property Taxes in 2017?

Post by Smilodon » Sat Dec 09, 2017 5:05 pm

Nate79 wrote:
Tue Dec 05, 2017 11:34 am
You can not pay estimates, non assessed values and deduct.
I was wondering about that. I have in hand a "Proposed Taxes 2018" for my home's property taxes, but not the actual bill yet. I called the county office and they said I can prepay for 2018 and it will act as a "credit" on my account. I was thinking to write them a check for the proposed 2018 amount, and deduct it on my 2017 federal taxes, since I do not anticipate itemizing next year.

Are you saying I cannot deduct this on my 2017 federal income taxes because it is just an estimate? I searched the IRS website but could not find anything definitive on this. However, it seems plausible it is not allowed, otherwise what would stop me from prepaying and deducting an arbitrary amount, even ahead several years' worth. A citation to this rule would be appreciated!

Thanks...

Thesaints
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Re: Pre-Pay Property Taxes in 2017?

Post by Thesaints » Sat Dec 09, 2017 5:18 pm

You can if they accept the payment. Although it is “officially accept” with a dated and stamped receipt, not with a phone call.

MikeG62
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Re: Pre-Pay Property Taxes in 2017?

Post by MikeG62 » Sun Dec 10, 2017 7:32 am

Smilodon wrote:
Sat Dec 09, 2017 5:05 pm
Nate79 wrote:
Tue Dec 05, 2017 11:34 am
You can not pay estimates, non assessed values and deduct.
I was wondering about that. I have in hand a "Proposed Taxes 2018" for my home's property taxes, but not the actual bill yet. I called the county office and they said I can prepay for 2018 and it will act as a "credit" on my account. I was thinking to write them a check for the proposed 2018 amount, and deduct it on my 2017 federal taxes, since I do not anticipate itemizing next year.

Are you saying I cannot deduct this on my 2017 federal income taxes because it is just an estimate? I searched the IRS website but could not find anything definitive on this. However, it seems plausible it is not allowed, otherwise what would stop me from prepaying and deducting an arbitrary amount, even ahead several years' worth. A citation to this rule would be appreciated!

Thanks...
Posted this yesterday in a similar thread.

https://ustaxcourt.gov/InOpHistoric/HOFFMAN.TCM.WPD.pdf

See Section II on pages 6 & 7.
Real Knowledge Comes Only From Experience

Chip
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Re: Pre-Pay Property Taxes in 2017?

Post by Chip » Sun Dec 10, 2017 7:47 am

MikeG62 wrote:
Sun Dec 10, 2017 7:32 am
Posted this yesterday in a similar thread.

https://ustaxcourt.gov/InOpHistoric/HOFFMAN.TCM.WPD.pdf

See Section II on pages 6 & 7.
Thanks for posting that. Everyone should realize that the tax law relating to property taxes is different than the law relating to state income taxes. Ignore the difference at your peril. :D

Here's the relevant quote from the Tax Court case you linked:
Tax Court wrote:Section 164(a)(1) allows a deduction for real property taxes. Deduction of prepaid real property taxes has been disallowed where a cash basis taxpayer failed to establish that the prepayment represented assessed, rather than estimated, taxes, and that such taxes were due in the year they were paid. See Hradesky v. Commissioner, 540 F.2d 821 (5th Cir. 1976), affg. per curiam 65 T.C. 87 (1975).

tmhudg
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Re: Pre-Pay Property Taxes in 2017?

Post by tmhudg » Sun Dec 10, 2017 10:49 am

I was considering posting a similar question as the OP. I too have had an income boost this year - from a lump sum severance package. Not quite at the level of the OP but large nonetheless.

I curious as to how much this really helps though. I know the answer is to "model it yourself" but to me, it just seems like you are moving the tax bill from one year to another. The deduction comes straight off the tax owed right? So I'm not affecting my income level and my tax *rate*. Assuming it's not a burden to actually pay my taxes this year, what is the real benefit?

Let's say I pre pay 2K in property taxes before the end of the year (I called my local tax collector and they said I could do this). My 2017 tax bill is reduced by that amount. Obviously, I *don't* get that deduction for 2018 (unless I continue this each year I guess). All I've really done is delay the payment of the tax by a year. I guess I get a little float but it doesn't seem worth the hassle - at least at my tax levels.

Am I missing something important?

MikeG62
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Re: Pre-Pay Property Taxes in 2017?

Post by MikeG62 » Sun Dec 10, 2017 11:02 am

tmhudg wrote:
Sun Dec 10, 2017 10:49 am
I was considering posting a similar question as the OP. I too have had an income boost this year - from a lump sum severance package. Not quite at the level of the OP but large nonetheless.

I curious as to how much this really helps though. I know the answer is to "model it yourself" but to me, it just seems like you are moving the tax bill from one year to another. The deduction comes straight off the tax owed right? So I'm not affecting my income level and my tax *rate*. Assuming it's not a burden to actually pay my taxes this year, what is the real benefit?

Let's say I pre pay 2K in property taxes before the end of the year (I called my local tax collector and they said I could do this). My 2017 tax bill is reduced by that amount. Obviously, I *don't* get that deduction for 2018 (unless I continue this each year I guess). All I've really done is delay the payment of the tax by a year. I guess I get a little float but it doesn't seem worth the hassle - at least at my tax levels.

Am I missing something important?
Yes, two things potentially.

First is you may not itemize in 2018 - so the pull forward to 2018 gets you a deduction you would otherwise lose if paid in 2018.

Second, even if are able to itemize in 2018, if your marginal tax rate is higher in 2017 than 2018, you benefit from the tax rate arbitrage.
Real Knowledge Comes Only From Experience

tmhudg
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Re: Pre-Pay Property Taxes in 2017?

Post by tmhudg » Sun Dec 10, 2017 11:43 am

MikeG62 wrote:
Sun Dec 10, 2017 11:02 am

Yes, two things potentially.

First is you may not itemize in 2018 - so the pull forward to 2018 gets you a deduction you would otherwise lose if paid in 2018.
Good point. The bulk of my deduction is from SALT.
Second, even if are able to itemize in 2018, if your marginal tax rate is higher in 2017 than 2018, you benefit from the tax rate arbitrage.
Sorry for being slow but I don't really understand this. I googled tax rate arbitrage and it seems to be just a term for the process we are discussing here - moving income and expenses to different times/categories in order to save on taxes.

Regardless of my rate in any one year, if the actual dollar value of taxes I owe exceeds the property tax deduction I will take, what does the rate matter? (Maybe that's the key? I don't envision a case where my rate is low enough such that my overall tax bill is less than my property tax deduction).

If my rate in 2017 results in a tax bill of 50K say, and I pre pay 2K of property tax, I save that extra 2K on my final tax bill. If my rate in 2018 is lower and I get a tax bill of 30K but deduct the 2K of property tax in that year instead, I still save 2K on my final tax bill right?

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CAsage
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Re: Pre-Pay Property Taxes in 2017?

Post by CAsage » Sun Dec 10, 2017 11:45 am

tmhudg wrote:
Sun Dec 10, 2017 10:49 am
I curious as to how much this really helps though. I know the answer is to "model it yourself" but to me, it just seems like you are moving the tax bill from one year to another. The deduction comes straight off the tax owed right? So I'm not affecting my income level and my tax *rate*. Assuming it's not a burden to actually pay my taxes this year, what is the real benefit?
Am I missing something important?
Search the (many) posts on tax deduction bunching. What you are really doing is trying to double up on taxes in alternate years, then take only the standard deduction without any of the itemization in the off years. This works because often, the bulk of your itemized deductions is actually below the standard deduction you would get anyway. So, you benefit only from the itemized deductions that exceed your standard deduction.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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CAsage
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Re: Pre-Pay Property Taxes in 2017?

Post by CAsage » Sun Dec 10, 2017 11:50 am

tmhudg wrote:
Sun Dec 10, 2017 11:43 am
If my rate in 2017 results in a tax bill of 50K say, and I pre pay 2K of property tax, I save that extra 2K on my final tax bill. If my rate in 2018 is lower and I get a tax bill of 30K but deduct the 2K of property tax in that year instead, I still save 2K on my final tax bill right?
If you deduct an extra $2k of property taxes, it will cut your bill by your rate (28% ?? your number here) times $2k, or perhaps $560. The real savings with bunching comes by NOT itemizing every other year. If you have a very large mortgage interest deduction, or high state taxes, or your property taxes cannot be prepaid at all, then there's no game to play here.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

jebmke
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Re: Pre-Pay Property Taxes in 2017?

Post by jebmke » Sun Dec 10, 2017 11:52 am

tmhudg wrote:
Sun Dec 10, 2017 11:43 am
Regardless of my rate in any one year, if the actual dollar value of taxes I owe exceeds the property tax deduction I will take, what does the rate matter? (Maybe that's the key? I don't envision a case where my rate is low enough such that my overall tax bill is less than my property tax deduction).
A given amount of deduction is worth more if the marginal tax rate is higher. So, for example, if I have $1,000 for a deduction that I can take in 2017 or 2018, I generally want to take it in the year when the rate is higher since the tax savings will be higher.
When you discover that you are riding a dead horse, the best strategy is to dismount.

tmhudg
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Re: Pre-Pay Property Taxes in 2017?

Post by tmhudg » Sun Dec 10, 2017 12:06 pm

jebmke wrote:
Sun Dec 10, 2017 11:52 am
tmhudg wrote:
Sun Dec 10, 2017 11:43 am
Regardless of my rate in any one year, if the actual dollar value of taxes I owe exceeds the property tax deduction I will take, what does the rate matter? (Maybe that's the key? I don't envision a case where my rate is low enough such that my overall tax bill is less than my property tax deduction).
A given amount of deduction is worth more if the marginal tax rate is higher. So, for example, if I have $1,000 for a deduction that I can take in 2017 or 2018, I generally want to take it in the year when the rate is higher since the tax savings will be higher.
Thank you all - I'm an idiot. In my head I was thinking of this as a tax credit - not the deduction that it is. I'm embarrassed but thanks for helping me through this.

I will go back under my rock...

Smilodon
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Re: Pre-Pay Property Taxes in 2017?

Post by Smilodon » Tue Dec 12, 2017 6:58 pm

For what it's worth, Hoffman v. Commissioner of Internal Revenue was appealed in 2001, but was affirmed by the United States Court of Appeals, Fourth Circuit on May 8, 2001. See 8 Fed.Appx. 262:

"Petitioners' also challenge the Tax Court's ruling as to the prepayment of real estate taxes for the farm. In December 1996, Mrs. Hoffman paid a portion of the 1997 real property taxes. Real property taxes are allowed as a deduction "for the taxable year within which paid or accrued." 26 U.S.C. § 164(a). The Tax Court disallowed a deduction for the tax year 1996 because the 1997 property taxes had not yet been assessed. Taxes which have not been actually assessed have not accrued. Lewis v. Commissioner, 47 T.C.M. (CCH) 605, 1983 WL 14730 (1983); Hradesky v. Commissioner, 540 F.2d 821 (5th Cir.1976). Thus, any partial payment in 1996 was not deductible in that tax year. Id.

We have considered the Petitioners' remaining contentions and find them to be without merit.

For these reasons, we affirm the decision of the United States Tax Court."

DonDraper
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Re: Pre-Pay Property Taxes in 2017?

Post by DonDraper » Wed Dec 13, 2017 8:30 pm

I also live in NJ and I’m considering prepaying the 1st and 2nd quarter 2018 real estate taxes.

The township sends out a bill every summer with a tax amount for the next 4 quarters.
(3rd and 4th quarter of current year and 1st and 2nd quarter “preliminary tax” for the following year)

The question is, is that 1st and 2nd quarter 2018 tax considered assessed in 2017? I would say yes, because it’s locked in with a specific amount and due date that will not change.

Anyone have any opinion if I can deduct those first 2 quarters of 2018 taxes in 2017?

Nate79
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Re: Pre-Pay Property Taxes in 2017?

Post by Nate79 » Wed Dec 13, 2017 8:33 pm

DonDraper wrote:
Wed Dec 13, 2017 8:30 pm
I also live in NJ and I’m considering prepaying the 1st and 2nd quarter 2018 real estate taxes.

The township sends out a bill every summer with a tax amount for the next 4 quarters.
(3rd and 4th quarter of current year and 1st and 2nd quarter “preliminary tax” for the following year)

The question is, is that 1st and 2nd quarter 2018 tax considered assessed in 2017? I would say yes, because it’s locked in with a specific amount and due date that will not change.

Anyone have any opinion if I can deduct those first 2 quarters of 2018 taxes in 2017?
As long as the values are actual and will not change I would say yes. If they are estimated that will be revised then I would say no.

DonDraper
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Re: Pre-Pay Property Taxes in 2017?

Post by DonDraper » Wed Dec 13, 2017 8:38 pm

Nate79 wrote:
Wed Dec 13, 2017 8:33 pm
DonDraper wrote:
Wed Dec 13, 2017 8:30 pm
I also live in NJ and I’m considering prepaying the 1st and 2nd quarter 2018 real estate taxes.

The township sends out a bill every summer with a tax amount for the next 4 quarters.
(3rd and 4th quarter of current year and 1st and 2nd quarter “preliminary tax” for the following year)

The question is, is that 1st and 2nd quarter 2018 tax considered assessed in 2017? I would say yes, because it’s locked in with a specific amount and due date that will not change.

Anyone have any opinion if I can deduct those first 2 quarters of 2018 taxes in 2017?

As long as the values are actual and will not change I would say yes. If they are estimated that will be revised then I would say no.
Thanks. Yes those amounts are definitely set in stone and will not change. Any true ups to 2018 will take place with the next bill in the 3rd and 4th quarters.

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yukonjack
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Re: Pre-Pay Property Taxes in 2017?

Post by yukonjack » Wed Dec 13, 2017 9:18 pm

tmhudg wrote:
Sun Dec 10, 2017 10:49 am
I was considering posting a similar question as the OP. I too have had an income boost this year - from a lump sum severance package. Not quite at the level of the OP but large nonetheless.

I curious as to how much this really helps though. I know the answer is to "model it yourself" but to me, it just seems like you are moving the tax bill from one year to another. The deduction comes straight off the tax owed right? So I'm not affecting my income level and my tax *rate*. Assuming it's not a burden to actually pay my taxes this year, what is the real benefit?

Let's say I pre pay 2K in property taxes before the end of the year (I called my local tax collector and they said I could do this). My 2017 tax bill is reduced by that amount. Obviously, I *don't* get that deduction for 2018 (unless I continue this each year I guess). All I've really done is delay the payment of the tax by a year. I guess I get a little float but it doesn't seem worth the hassle - at least at my tax levels.

Am I missing something important?
I think there would be a definite help if tax laws change before the end of the year and you still have time to act. Of course at this point that remains to be seen.

Nate79
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Re: Pre-Pay Property Taxes in 2017?

Post by Nate79 » Wed Dec 13, 2017 9:24 pm

DonDraper wrote:
Wed Dec 13, 2017 8:38 pm
Nate79 wrote:
Wed Dec 13, 2017 8:33 pm
DonDraper wrote:
Wed Dec 13, 2017 8:30 pm
I also live in NJ and I’m considering prepaying the 1st and 2nd quarter 2018 real estate taxes.

The township sends out a bill every summer with a tax amount for the next 4 quarters.
(3rd and 4th quarter of current year and 1st and 2nd quarter “preliminary tax” for the following year)

The question is, is that 1st and 2nd quarter 2018 tax considered assessed in 2017? I would say yes, because it’s locked in with a specific amount and due date that will not change.

Anyone have any opinion if I can deduct those first 2 quarters of 2018 taxes in 2017?

As long as the values are actual and will not change I would say yes. If they are estimated that will be revised then I would say no.
Thanks. Yes those amounts are definitely set in stone and will not change. Any true ups to 2018 will take place with the next bill in the 3rd and 4th quarters.
Why would there be a true up of an assessed value? Sounds like an estimate to me.

DonDraper
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Re: Pre-Pay Property Taxes in 2017?

Post by DonDraper » Wed Dec 13, 2017 9:43 pm

Nate79 wrote:
Wed Dec 13, 2017 9:24 pm
DonDraper wrote:
Wed Dec 13, 2017 8:38 pm
Nate79 wrote:
Wed Dec 13, 2017 8:33 pm
DonDraper wrote:
Wed Dec 13, 2017 8:30 pm
I also live in NJ and I’m considering prepaying the 1st and 2nd quarter 2018 real estate taxes.

The township sends out a bill every summer with a tax amount for the next 4 quarters.
(3rd and 4th quarter of current year and 1st and 2nd quarter “preliminary tax” for the following year)

The question is, is that 1st and 2nd quarter 2018 tax considered assessed in 2017? I would say yes, because it’s locked in with a specific amount and due date that will not change.

Anyone have any opinion if I can deduct those first 2 quarters of 2018 taxes in 2017?

As long as the values are actual and will not change I would say yes. If they are estimated that will be revised then I would say no.
Thanks. Yes those amounts are definitely set in stone and will not change. Any true ups to 2018 will take place with the next bill in the 3rd and 4th quarters.
Why would there be a true up of an assessed value? Sounds like an estimate to me.
They call it a preliminary tax. I suppose it’s an estimate of sorts but it’s their estimate and I’m required to pay that exact amount. They don’t determine the full 2018 liability until later in the year and then they subtract out those 2 payments I was required to make.

Nothing is easy I suppose.

JBTX
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Re: Pre-Pay Property Taxes in 2017?

Post by JBTX » Wed Dec 13, 2017 10:13 pm

I’ve almost always paid property taxes ahead. In TX they bill you in November for the next year and it is due in February. Most people pay it in the prior year to accelerate the deduction.

One year I bunched two years together in order to have enough to itemize.

This year I am being a little more aggressive in paying things ahead, partly because of subjects we can’t talk about. I went and paid my January mortgage payment (which is actually December) this month to accelerate Interest. I will have a lot of sales taxes and medical expenses this year

I’m not sure about AMT. I’ve never been hit with it before but my itemized deductions will likely be higher than most years.

HillCountry
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Re: Pre-Pay Property Taxes in 2017?

Post by HillCountry » Wed Dec 13, 2017 10:41 pm

What ivk5 said. AMT.

523HRR
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Re: Pre-Pay Property Taxes in 2017?

Post by 523HRR » Thu Dec 21, 2017 5:39 pm

HillCountry wrote:
Wed Dec 13, 2017 10:41 pm
What ivk5 said. AMT.
Same for me. Was going to prepay my property tax before the end of 2017. But I ran the numbers and, because I'm into AMT, it made zero difference on my overall tax liability.

mnm0101
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Re: Pre-Pay Property Taxes in 2017?

Post by mnm0101 » Sat Mar 31, 2018 9:37 pm

DonDraper: I'm in a similar situation here in NJ. If you don't mind me asking, what did you end up doing? If you pre-paid the entire 2018 property tax liability before 12/31/17, did you deduct all 4 quarter payments for 2018 on your 2017 Federal tax return? I'm pretty sure I can deduct the first two quarters, not sure of the last 2 quarter deduction.
DonDraper wrote:
Wed Dec 13, 2017 9:43 pm
Nate79 wrote:
Wed Dec 13, 2017 9:24 pm
DonDraper wrote:
Wed Dec 13, 2017 8:38 pm
Nate79 wrote:
Wed Dec 13, 2017 8:33 pm
DonDraper wrote:
Wed Dec 13, 2017 8:30 pm
I also live in NJ and I’m considering prepaying the 1st and 2nd quarter 2018 real estate taxes.

The township sends out a bill every summer with a tax amount for the next 4 quarters.
(3rd and 4th quarter of current year and 1st and 2nd quarter “preliminary tax” for the following year)

The question is, is that 1st and 2nd quarter 2018 tax considered assessed in 2017? I would say yes, because it’s locked in with a specific amount and due date that will not change.

Anyone have any opinion if I can deduct those first 2 quarters of 2018 taxes in 2017?

As long as the values are actual and will not change I would say yes. If they are estimated that will be revised then I would say no.
Thanks. Yes those amounts are definitely set in stone and will not change. Any true ups to 2018 will take place with the next bill in the 3rd and 4th quarters.
Why would there be a true up of an assessed value? Sounds like an estimate to me.
They call it a preliminary tax. I suppose it’s an estimate of sorts but it’s their estimate and I’m required to pay that exact amount. They don’t determine the full 2018 liability until later in the year and then they subtract out those 2 payments I was required to make.

Nothing is easy I suppose.

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