As is probably the case with all accounting and tax firms, Grossman Yanak & Ford LLP has been inundated with questions regarding the deductibility (as an itemized deduction) of amounts prepaid by December 31st for 2018 real property taxes. Generally, cash basis taxpayers (all individuals) are entitled to a tax deduction in the year that a liability becomes fixed and due, and the amount due is physically paid by the last day of the tax year. For individuals, the last day of the tax year is usually December 31. However, the last business day of the year is December 29, 2017, so action before that time is required.
The application of these parts of the tax law to the property tax issue is as follows. To be deductible, the liability must generally be fixed. The easiest way for this test to be fixed is by receipt of a bill for the real estate taxes from the taxing authority. Payment of “anticipated” 2018 real property taxes as a result of basing the payment on actual 2017 real estate taxes is NOT sufficient. Such amounts are more akin to a deposit and are not deductible.
In addition, taxpayers must be able to demonstrate “proof of payment” for the real property taxes paid. In most cases, such evidence as stamped receipts from the taxing authority and cancelled checks will suffice to prove payment.
Much confusion seems to be surrounding this issue as the end of the year approaches. On December 27, 2017, the Internal Revenue Service provided an Advisory Notice (IR-2017-210), addressing this matter and providing clarification.
Pursuant to the Notice,
In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.
This provision sets the state or local tax authority as a critical party to ensuring the deductibility of any amounts paid before yearend. To be deductible, the only certain evidence of the liability is to have a tax bill issued by the applicable state or local tax authority.
The GYF tax professionals have made contact with various local real property tax authorities and found inconsistent treatment for this issue. While certain tax jurisdictions are accepting early payment of 2018 real property taxes, they are not providing taxpayers with a bill for those taxes, which would make these payments non-deductible in 2017. Other tax authorities are citing the Pennsylvania Act of May 25, 1945, P.L. 1050, No. 394 and/or the Pennsylvania Home Rule as the basis for their inability or reluctance to issue bills early. In these cases, they are not open to accepting early payment.
The IRS Notice provides two key examples to aid taxpayers in understanding this issue:
Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017 through June 30, 2018.
On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018.
Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.
County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 through June 30, 2018.
County B intends to make the usual assessment in July 2018 for the period July 1, 2018 through June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year.
Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.
In light of our research and the information contained in the IRS Notice, our recommendation is for taxpayers to contact their local tax authorities to determine if that authority is able, and open, to issuing an actual billing for real property taxes prior to December 31, 2017, and allowing for the payment of that bill by that date. If the authority is not able to do so, it is unlikely that a valid tax deduction can be claimed for early payment of 2018 real property taxes.
Finally, the IRS release reminds taxpayers that a number of provisions remain available until the end of the year that could affect 2017 tax bills. See IR-17-191 for more information about charitable contributions. The deadline to make contributions for individual retirement accounts – which can be used by some taxpayers on 2017 tax returns – is the April 2018 tax deadline.
Read our Tax Alert for details about the major provisions of the recent Tax Reform legislation.