Deducting State & Local Taxes Under the New Tax Law: Is Prepayment Right for You?


Much as been written about the new tax law.  One of the biggest questions has to do with the deductibility of State and Local Income, Sales and Real Property Taxes (SALT).  Under the tax law just signed by President Trump, starting in 2018, individuals will only be able to deduct SALT up to a maximum of $10,000.  While the new law specifically prohibited an individual from “prepaying” their 2018 state and local income taxes in 2017 (and deducting such taxes on their 2017 income tax return), the new tax law did not prohibit (nor does it permit) individuals from paying their 2018 state and local real property taxes in 2017 and deducting such taxes on their 2017 income tax returns.

For some taxpayers paying (and deducting) their 2018 real property taxes in 2017 will be advantageous to reduce 2017 income taxes.  Moreover, since many taxpayers will be limited in deducting all of their SALT taxes, paying the tax in 2018 may be the only way to deduct these taxes.

A few cautions:

  1. SALT taxes are a preference item for Alternative Minimum Tax (AMT) purposes.  Therefore, if you are in the AMT, then paying (and deducting) 2018 real property taxes in 2017 may not produce much tax savings.
  2. There is NO IRA guidance on this.  And there are some old tax cases that indicate that this strategy may not work.
  3. If you have a mortgage and your mortgage company pays your real estate taxes, you must inform that company that you have paid the taxes.  Some mortgage companies are working on making this easy to do.

In any event, many local jurisdictions and states are making it easy for their constituents to pay 2018 real property taxes in 2017.  Locally, many jurisdictions already allow this.  Just today, the Montgomery County (MD) Council voted to allow the prepayment of real estate taxes.  According to its website: “We are waiting for the legislation to be finalized and put into effect.  We will update this website to provide information about how to prepay your 2018 taxes.”  The website is: https://apps.montgomerycountymd.gov/realpropertytax.

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