If you live in New York or any other state with “higher” property taxes you should determine whether or not it makes sense to pay your 2018 property taxes prior to December 31, 2017. Why? Tax reform will be capping your state and local tax deductions at $10,000 beginning in 2018.
To prevent taxpayers from navigating around the $10,000 deduction cap that will take effect in 2018, Congress wrote right into the tax bill that taxpayers will not be able to prepay their 2018 state income taxes and take the tax deduction in 2017. However, they left the door open for prepaying your 2018 property taxes in 2017 and taking the deduction in 2017 before the cap goes into effect.
Should you do this? The answer depends on your expected income for the 2017 tax year.
Alternative Minimum Tax
Before you rush down to your town office in the last week of December to prepay your 2018 taxes, if you think your income level in 2017 is going to make you subject to AMT, I will save you the trip. Alternative Minimum Tax (AMT) is a special tax calculation that was implemented back in 1969 to make sure the “wealthy” pay their fair share of taxes. The AMT calculation allows fewer deductions and exemptions than the standard tax system. Taxpayers have to calculate their taxes the “normal way” and then calculate their taxes under the AMT method. Whichever method generates the higher tax liability is the one that you pay.
The problem with AMT is over time they did not index the exemption level adequately for wage inflation since its inception in 1969. Again it was supposed to stop the wealthy from taking advantage of tax deductions. In 2017, the exemptions amounts for AMT are as follows:
Single Filer: $54,300
Married Filing Joint: $84,500
Not exactly what many of us would considered wealthy. It gets better, that exemption begins to phase out at the following levels in 2017 making more of your income subject to the special AMT calculation.
Single Filers: $120,700
Married Filing Joint: $160,900
Why am I going into so much detail amount AMT? Remember, AMT adds back deductions that were previously allowed under the standard calculation. One of those add backs is property taxes. So if your AMT tax liability exceeds your tax liability calculated with the standard formula, there is no point in prepaying your 2018 property taxes because you won’t be able to deduct them anyways. Those deductions get added back in as part of the AMT calculation.
Contact Your Accountant
The AMT calculation is complex. If you are not able to accurately estimate whether or not your AMT tax liability will be greater than the standard calculation, you should contact your accountant for guidance. It may save you the trip and from wasting time waiting in line at the town office for nothing.
Those Not Subject To AMT
If you are not subject to AMT and you plan to itemize in 2017, it probably does makes sense to prepay your property taxes for 2018 by December 29, 2017. Otherwise you are just going to lose the deduction in 2018 because it will most likely be more advantageous at that income level to just take the larger standard deduction that will be available in 2018. You end up with the best of both worlds. You get to deduct your 2018 property taxes in 2017 which reduces your income and then capture the large standard deduction in 2018,
How Do You Prepay Your Property Taxes?
So how do you pay your property taxes early? It’s most likely going to require your checkbook and a trip to your town office, First, call your town office to make sure the 2018 property tax invoices are available. Once you know that they are available, you should drive down to your town office prior to December 29, 2017 and pay the tax bill.
If you escrow taxes, which many homeowners do, there is a good chance that your mortgage company will not receive your property tax bill in time to issue a check from your escrow account prior to December 29th. For this reason, you should call your mortgage services company and determine what they need to prove that you paid your 2018 property taxes with a personal check. This will hopefully prevent them from issuing a check out of your escrow account for the property taxes that you already paid with your personal check for 2018.
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.