I never thought I would write about this topic for an audience that does not consist mainly of tax wonks, but let’s talk about what it means when a tax is “assessed” – and why it may soon matter to thousands of people who are rushing to prepay next year’s property taxes.
Your income tax is “self-assessed.” You create your own tax bill when you send in your return. At that time, you pay any balance that is due after prepayments for withholding and estimated taxes. But your obligation to pay your income taxes does not arise when you submit your return (otherwise it could be very profitable never to file a return); it arises when you receive the income in the first place.
Property taxes are not self-assessed. A local government calculates or inquires about the value of the taxable property, determines the rate of tax to be collected against that value, notifies you of the result and issues a bill. In many situations there is an established schedule that includes opportunities to appeal before the tax is due and payable. It is also common for property taxes to be payable in installments after assessment.
The obligation to pay property taxes is not finalized, at least as to amount, until the taxing authority sets the tax rate. Property may be transferred between the date of the assessment and the due date of the tax; the obligation to pay falls on whoever owns the property when payment is due.
I have been a tax adviser for over 30 years. Like practically everyone in my field, I have often advised clients to pay their local obligations before year-end to accelerate or otherwise increase the benefit of a federal deduction. This can include taxes that have been assessed this year but are not due until next year. But nobody ever advised anyone to pay taxes that would not even be assessed until next year – and if we did, why would we stop at just one year? If someone had a very profitable year that pushed him or her into a higher tax bracket, why would we not recommend paying two years of property taxes in advance, or five, or maybe even 10?
We never did this because, under the tax laws, it doesn’t work. You can’t satisfy a debt that has not actually arisen. The so-called advance payments that taxpayers would seek to deduct are nothing more than deposits in the custody of local tax officials, to be refunded if the liability does not actually arise in the future. The federal income tax system does not lend itself to this sort of gaming.
Now you understand why the Internal Revenue Service warned this week that some of the people who have scrambled to “prepay” property taxes are apt to be disappointed when the action does not save them money on their 2017 federal taxes. Although there is an element of Monday-morning quarterbacking in this, it is also why I feel some local officials missed an opportunity to give their constituents a break.
House Republicans unveiled their plan to cap property tax deductions nearly two months ago, on Nov. 2. The original bill capped such deductions at $10,000 annually. (The final version allows taxpayers to deduct $10,000 total of state and local taxes, including income, sales and property taxes.) This early announcement of legislators’ intentions left a reasonable window for contingency planning, but many government officials – including New York’s Gov. Andrew Cuomo – seemed not to snap into action until the bill landed on President Trump’s desk in late December.
Cuomo issued an executive order on Dec. 22 that purportedly authorized New Yorkers to prepay 2018 property taxes in order to claim a deduction against federal taxes for 2017, as long as such payments are received or postmarked by Dec. 31. The order also authorized local governments to immediately issue tax warrants for 2018 property taxes. A tax warrant is the document that establishes the debt owed for taxes on property.
Other jurisdictions that did not previously allow property tax prepayment have taken similar action. Many municipalities in states like Massachusetts and California saw huge influxes in the days after the Christmas holiday, as taxpayers scrambled to secure a potential benefit before it vanished on New Year’s Day.
In my home state of Florida, property taxes are technically due in March but can be prepaid at a discount as early as November. Pretty much everyone pays early to get the discount, as well as the tax deduction. The taxes that we would typically pay next November are actually due in March 2019. Florida officials say there is no way to pay those taxes early. Connecticut isn’t allowing prepayment either, and many New Jersey towns that didn’t outright forbid prepayment still discouraged it.
The newly enacted tax law states that taxpayers cannot deduct prepayments of 2018 state income taxes on their 2017 returns, but did not explicitly address property taxes. On Wednesday, the IRS issued guidance clarifying that if local governments haven’t assessed a property tax for 2018, taxpayers cannot deduct a prepayment. Someone is bound to challenge this position, and there are some tax professionals who question whether the IRS is correct, but I don’t think taxpayers who defy the IRS view will have much of a case.
The scramble to prepay taxes ahead of the change in federal tax rules has been a huge headache for many local officials, some of whom have made heroic efforts to try to accommodate the unusual rush by citizens to hand over their money. Those officials face big practical problems in abruptly changing their tax collection procedures.
What if an individual owns multiple parcels in a jurisdiction; which one gets the payment? What about a typical situation in which bills don’t go directly to taxpayers at all, but rather to mortgage companies and other escrow agents – and the locality ends up being paid twice? And when a single collection department receives money on behalf of multiple agencies (schools, towns, villages, local improvement districts) and a taxpayer just throws a check at the collector, which agency gets the money?
Moreover, when the collectors receive all this unbilled money, where do they put it? How do they safeguard it against loss and theft? Most local tax offices are set up as one-way streets; unlike the IRS, they do not routinely issue refunds or credit overpayments to the following years. Expecting them to create these procedures overnight is likely to be unrealistic in many cases, and downright dangerous in some. Not every local government is a model of fiscal probity.
In New York, despite Cuomo’s executive order, Westchester County announced it was not possible to responsibly issue tax warrants by the end of the year. Some municipalities within the county are accepting prepayment of local property taxes; some are not.
For many who rushed to pay property taxes based on an estimate, often at the urging of state or local officials, the prospect of learning it was all for naught is understandably unwelcome. Some municipalities, such as Fairfax County, Virginia, may find themselves under pressure to return certain prepayments in light of the IRS’ guidance. But since municipalities don’t typically issue refunds or credits, it is unclear whether this is practical, or even possible.
So if you managed to prepay your 2018 property taxes as directed by your accountant or by your favorite cable news talking head, and if those taxes were based on something firmer than an estimate, congratulations. But if you didn’t, don’t feel bad. There is another way to save money on your state and local taxes in 2018 and later years: Try voting for officials who are prepared to make government more efficient and less expensive. Most of the time, those are not the sort of people who wait until the last minute to get ready for major changes.
Posted by Larry M. Elkin, CPA, CFP®
I never thought I would write about this topic for an audience that does not consist mainly of tax wonks, but let’s talk about what it means when a tax is “assessed” – and why it may soon matter to thousands of people who are rushing to prepay next year’s property taxes.
Your income tax is “self-assessed.” You create your own tax bill when you send in your return. At that time, you pay any balance that is due after prepayments for withholding and estimated taxes. But your obligation to pay your income taxes does not arise when you submit your return (otherwise it could be very profitable never to file a return); it arises when you receive the income in the first place.
Property taxes are not self-assessed. A local government calculates or inquires about the value of the taxable property, determines the rate of tax to be collected against that value, notifies you of the result and issues a bill. In many situations there is an established schedule that includes opportunities to appeal before the tax is due and payable. It is also common for property taxes to be payable in installments after assessment.
The obligation to pay property taxes is not finalized, at least as to amount, until the taxing authority sets the tax rate. Property may be transferred between the date of the assessment and the due date of the tax; the obligation to pay falls on whoever owns the property when payment is due.
I have been a tax adviser for over 30 years. Like practically everyone in my field, I have often advised clients to pay their local obligations before year-end to accelerate or otherwise increase the benefit of a federal deduction. This can include taxes that have been assessed this year but are not due until next year. But nobody ever advised anyone to pay taxes that would not even be assessed until next year – and if we did, why would we stop at just one year? If someone had a very profitable year that pushed him or her into a higher tax bracket, why would we not recommend paying two years of property taxes in advance, or five, or maybe even 10?
We never did this because, under the tax laws, it doesn’t work. You can’t satisfy a debt that has not actually arisen. The so-called advance payments that taxpayers would seek to deduct are nothing more than deposits in the custody of local tax officials, to be refunded if the liability does not actually arise in the future. The federal income tax system does not lend itself to this sort of gaming.
Now you understand why the Internal Revenue Service warned this week that some of the people who have scrambled to “prepay” property taxes are apt to be disappointed when the action does not save them money on their 2017 federal taxes. Although there is an element of Monday-morning quarterbacking in this, it is also why I feel some local officials missed an opportunity to give their constituents a break.
House Republicans unveiled their plan to cap property tax deductions nearly two months ago, on Nov. 2. The original bill capped such deductions at $10,000 annually. (The final version allows taxpayers to deduct $10,000 total of state and local taxes, including income, sales and property taxes.) This early announcement of legislators’ intentions left a reasonable window for contingency planning, but many government officials – including New York’s Gov. Andrew Cuomo – seemed not to snap into action until the bill landed on President Trump’s desk in late December.
Cuomo issued an executive order on Dec. 22 that purportedly authorized New Yorkers to prepay 2018 property taxes in order to claim a deduction against federal taxes for 2017, as long as such payments are received or postmarked by Dec. 31. The order also authorized local governments to immediately issue tax warrants for 2018 property taxes. A tax warrant is the document that establishes the debt owed for taxes on property.
Other jurisdictions that did not previously allow property tax prepayment have taken similar action. Many municipalities in states like Massachusetts and California saw huge influxes in the days after the Christmas holiday, as taxpayers scrambled to secure a potential benefit before it vanished on New Year’s Day.
In my home state of Florida, property taxes are technically due in March but can be prepaid at a discount as early as November. Pretty much everyone pays early to get the discount, as well as the tax deduction. The taxes that we would typically pay next November are actually due in March 2019. Florida officials say there is no way to pay those taxes early. Connecticut isn’t allowing prepayment either, and many New Jersey towns that didn’t outright forbid prepayment still discouraged it.
The newly enacted tax law states that taxpayers cannot deduct prepayments of 2018 state income taxes on their 2017 returns, but did not explicitly address property taxes. On Wednesday, the IRS issued guidance clarifying that if local governments haven’t assessed a property tax for 2018, taxpayers cannot deduct a prepayment. Someone is bound to challenge this position, and there are some tax professionals who question whether the IRS is correct, but I don’t think taxpayers who defy the IRS view will have much of a case.
The scramble to prepay taxes ahead of the change in federal tax rules has been a huge headache for many local officials, some of whom have made heroic efforts to try to accommodate the unusual rush by citizens to hand over their money. Those officials face big practical problems in abruptly changing their tax collection procedures.
What if an individual owns multiple parcels in a jurisdiction; which one gets the payment? What about a typical situation in which bills don’t go directly to taxpayers at all, but rather to mortgage companies and other escrow agents – and the locality ends up being paid twice? And when a single collection department receives money on behalf of multiple agencies (schools, towns, villages, local improvement districts) and a taxpayer just throws a check at the collector, which agency gets the money?
Moreover, when the collectors receive all this unbilled money, where do they put it? How do they safeguard it against loss and theft? Most local tax offices are set up as one-way streets; unlike the IRS, they do not routinely issue refunds or credit overpayments to the following years. Expecting them to create these procedures overnight is likely to be unrealistic in many cases, and downright dangerous in some. Not every local government is a model of fiscal probity.
In New York, despite Cuomo’s executive order, Westchester County announced it was not possible to responsibly issue tax warrants by the end of the year. Some municipalities within the county are accepting prepayment of local property taxes; some are not.
For many who rushed to pay property taxes based on an estimate, often at the urging of state or local officials, the prospect of learning it was all for naught is understandably unwelcome. Some municipalities, such as Fairfax County, Virginia, may find themselves under pressure to return certain prepayments in light of the IRS’ guidance. But since municipalities don’t typically issue refunds or credits, it is unclear whether this is practical, or even possible.
So if you managed to prepay your 2018 property taxes as directed by your accountant or by your favorite cable news talking head, and if those taxes were based on something firmer than an estimate, congratulations. But if you didn’t, don’t feel bad. There is another way to save money on your state and local taxes in 2018 and later years: Try voting for officials who are prepared to make government more efficient and less expensive. Most of the time, those are not the sort of people who wait until the last minute to get ready for major changes.
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