To Prepay or Not to Prepay Property Taxes

 

If you recall, I sent an email on Christmas Eve regarding strategies when ‘planning’ for 2018 tax law changes.

Prepayment of state and local income taxes were specifically addressed and not allowed by Congress.  However, treatment for prepayment of state and local property taxes were not specified.

This has been a major source of discussion among tax professionals.

The IRS has finally issued guidance (and examples) on December 27, 2017, see IR-2017-210.

In short, if your state and local officials have ASSESSED the 2018 real property tax prior to the end of 2017 AND that tax has been paid by the end of 2017 – then the ‘prepayment’ is deductible. 

If not, prepayment of any tax not yet assessed will not be deductible on your 2017 Individual Income Tax Return.

See What Massachusetts says about Prepayment of Property Taxes – click here.

 

** Individuals (including Married Couples) subject to AMT (Alternative Minimum Tax) will not receive benefit from prepayment of property taxes.**

 

 

Contact your tax professional to see if your ‘prepayment‘ will qualify for 2017 itemized deduction (before the limits kick in).

 

Let’s Look at Tax Reform: Conference Bill Changes

Much of the tax reform won’t take effect until January 2018 and likely will not affect 2017 filing season.  However, there are some planning factors that may affect what is done during this final month of 2017.
  • Medical Expenses
The common deduction (the bill is over 1000 pages long, so there may be others) that is retroactively affected by the tax reform is medical expenses.
  • State and Local Tax Deductions
This itemized deduction has been a hot topic over the last few weeks.  The elimination of this deduction has caused concern. States have attempted to accommodate prepayment of 2018 income and property taxes.  However, it appears that under the conference bill, prepayment of state and local income taxes will not circumvent the new $10,000 cap.
  • Mortgage Interest Deduction
This itemized deduction was put in place to encourage home ownership.  Caps are already placed on the mortgage and equity debt amounts. The concern was for the elimination or reduction of one of the deductions.
The conference bill, will (temporarily) reduce the mortgage cap for loans taken after yesterday, December 15, 2017 (also known as grandfathered in).  Any home equity debt deduction will be eliminated starting in 2018.
Both of those deductions and respective reductions are slated to return in 2026.
  • Alternative Minimum Tax (AMT)
Alternative Minimum Tax exemptions are increased for individuals; therefore it applies to fewer taxpayers.
  • ObamaCare 
The ObamaCare minimum coverage mandate penalty for individuals that do not have minimum health care coverage has been eliminated.  I’m not clear if this is for 2017 or applies beginning 2018.
  • Standard Deduction/Personal Exemptions
The standard deduction is applied when taxpayers opt to not itemize their deductions.  Many of the itemized deductions are eliminated or reduced in the new bill.  The increased standard deduction will be more beneficial for those taxpayers affected by the new rules for itemized deductions.  However, the personal exemptions will affect those with multiple dependents on their returns.  Although the personal exemptions have been considered ‘consolidated’ with the higher standard deduction rates – single parents (claiming Head of Household) will lose out if they have more than 1.1 children.  This is also the case if married individuals (claiming Married Filing Jointly) have more than 1 child.

 

This is not a complete summary of the proposed changes.  Check out this article to learn more.  It also has the complete PDF of the conference bill at the end of the article.

Erb, Kelly Phillips. “It’s Beginning To Look A Lot Like Tax Reform: Here’s What’s In The Final Version.” Forbes, Forbes Magazine, 16 Dec. 2017, http://www.forbes.com/sites/kellyphillipserb/2017/12/15/its-beginning-to-look-a-lot-like-tax-reform-heres-whats-in-the-final-version/#20924c4c4d63.

 

2017 TCJA Proposed Tax Reform

photo credit: Business Insider- Trump tax plan chart

What is the process for proposed tax reform???

There is a lengthy process before tax law (or any proposed changes) can be enacted.

“The Constitution says that “all bills for raising revenue shall originate in the House of Representatives” and that “Congress shall have the power to lay and collect taxes.” Presidents can, and frequently do, recommend changes to current tax laws, but only Congress can make the changes.

As the [Ways and Means] Committee [is the tax writing committee of the House of Representatives] reaches tentative decisions on the proposals, they draft them into legislative language. It also prepares a detailed report on the proposed Legislation. The report can be longer than the bill itself, and presents the Committee’s (the ‘House’) reasons for recommending the bill. The Internal Revenue Service and the courts may use this Committee report as an interpretation of the legislation. Once the bill and the report are completed, they get introduced in the House of Representatives for consideration

The [Senate Finance] Committee begins its formal work on the legislation after the House has passed its version of the bill. It holds hearings similar to those held earlier by the House Ways and Means Committee. Instead of considering the tax proposals made by the [the President] Administration, however, it considers the bill passed by the House.

Witnesses appear at the Committee hearings in the same order as in the Ways and Means Committee. They direct their testimony to the House version of the bill.

After the hearings are finished, the (Senate Finance) Committee marks up the House bill, similar to the markup by the Ways and Means Committee (the House). When the (Senate Finance) Committee completes its markup, the bill is usually very different from the one passed by the House. It then gets reported to the full Senate for floor action.

A report gets filed along with the bill. The report explains in detail the amendments made by the (Senate) Finance Committee.

The entire Senate debates the bill as reported by the Committee. During the debate, the Senators may further amend the bill before they bring it to a vote.

If the Senate passes the House version of the bill, without amendments, it gets sent directly to the President.”

– Resource Center. “Writing and Enacting Tax Legislation.” Taxes, U.S. Department of the Treasury, 5 Dec. 2010, 10:28am, www.treasury.gov/resource-center/faqs/Taxes/Pages/writing.aspx.