Should you prepay all, or part, of your 2018 real estate taxes in 2017? Due to the recent changes in the tax laws, many people will no longer be itemizing their deductions on their tax return beginning in 2018, but will instead be claiming the standard deduction of $24,000 for married couples, $12,000 for single and $18,000 for head of household. Therefore, there may not be a federal tax benefit to paying real estate taxes in 2018. However, note that New Jersey will still allow a deduction of up to $10,000 for real estate taxes on your 2018 tax return.
The question is whether it benefits you to prepay your 2018 real estate taxes by year end. And, if so, how much? If you are subject to Alternative Minimum Tax (AMT) in 2017 you will not receive a benefit of prepaying your real estate taxes. You can get an indication if you are subject to AMT by looking at your 2016 tax return, line 45 on page 2.
If you are not subject to AMT, then it may benefit you to prepay your 2018 real estate taxes by the end of this year. Also, if you will be claiming the standard deduction beginning in 2018, possibly consider prepaying any anticipated 2018 charitable contributions.
The IRS position is you can only prepay the amount billed. Since most towns bill for the first 6 months, that is the only amount the IRS will allow as a deduction. Governor Christie issued a notice yesterday to all New Jersey towns requiring them to accept full year payments. This only adds to the confusion because it doesn’t say the towns are required to also bill for the full year. Our suggestion is to only pay the taxes for which you have been billed. Paying more than that may create a risk of an IRS notice.
In addition, some towns only post the payment when received, which creates a problem if you choose to mail your payment. If you mail your payment, it is suggested to send the payment certified and return the receipt requested in case the town doesn’t post the payment until 2018.
Confused? Any time there are significant changes to the tax law, making educated decisions can be difficult until the rules are totally vetted. This new law includes not only massive changes, but is especially difficult as it came about at year end. We are doing our best to give you information as it becomes available.
If you have any additional questions, feel free to contact one of us at (973) 328-1825.
We wish you and your family a happy, healthy and less confusing new year.