Find Out If You Should Prepay Property Taxes

Find Out If You Should Prepay Property Taxes

Taxpayers living in states with “higher” property taxes such as New York may want to find out whether or not it makes sense to pay your 2018 property taxes before December 31, 2017. This is because beginning in 2018, their state and local tax deductions will be capped by tax reform.

The Congress included into the tax bill a law that says taxpayers are not allowed to prepay their 2018 state income taxes and take the tax deduction in 2017 in order to prevent them from navigating around the $10,000 deduction cap that will take effect in 2018. However, there is a hole within this law because people will still be able to prepay their 2018 property taxes in 2017 and take the deduction in 2017 before the cap is applied.

You will know whether you should prepay your 2018 property taxes by looking into your expected income for the 2017 tax year.

What is the Alternative Minimum Tax?

Do you think your income level in 2017 is going to make you subject to the Alternative Minimum Tax (AMT)? Don’t rush down to your town office in the last week of December to prepay your 2018 taxes right away. Implemented back in 1969, AMT is a special tax calculation use to make sure the “wealthy” pay their fair share of taxes.

Compared to the standard tax system, the AMT calculation allows lesser deductions and exemptions. Before calculating the taxpayer's taxes under the AMT method, they first have to calculate their taxes the “usual way”. You will have to pay whichever method generates a higher tax liability.

AMT, however, did not index the exemption level adequately for wage inflation since its inception in 1969 which creates a huge problem. The wealthy’s interest of taking advantage towards tax deductions are supposed to be stopped by the AMT as previously mentioned. The exemption amounts for AMT in 2017 is $54,300 for a single filer and $84,500 for married filing jointly.

Many of us don't really consider this as wealthy. More of your income becomes subject to the special AMT calculation after exemption begins to phase out at the following levels which are good news: $120,700 for single filers and 160,900 for married filing jointly.

It’s important that you understand the details involving AMT because it adds back deductions that were allowed under the standard calculation in the past. Property taxes is one of those add backs which means if your AMT tax liability is higher than your tax liability calculated with the standard formula, it’s useless if you prepay your 2018 property taxes as you won’t be allowed to deduct them anyways. Those deductions get added back in as part of the calculation of the AMT.

Why should you contact your accountant?

You must contact your account if you cannot accurately estimate whether or not your AMT tax liability will be greater than the standard calculation. You will find out how complicated AMT calculation is and contacting your accountant could be the best decision you’ll ever make. You’re not just saving time lining up at the town office, it will save you the trip as well.

What happens if you’re not subject to AMT?

It may be best for you to prepay your property taxes for 2018 by December 29, 2017, if you are not subject to AMT and you’re looking at itemizing in 2017. Otherwise, you’ll end up losing the deduction in 2018 as it will most likely be in greater advantage to you in that income level to just take the larger standard deduction that will be available in 2018. This way you can dance in both sides; deduct your 2018 property taxes in 2018 which reduces your income and in 2018, grab the large standard deduction.

How to prepay your property taxes?

Here are the following steps you can take to prepay your property taxes:

  • Call your town office to ensure that the 2018 property tax invoices are available.
  • Drive down your town office before December 29, 2017, arrives and pay the tax bill.
  • Call your mortgage services company if you’re just like many homeowners who escrow taxes to determine what they’re going to require from you to prove that you paid your 2018 property taxes through a personal check. The reason behind this is that your mortgage company will not receive your property tax bill in time to issue a check from your escrow account before the 29th of December. Your goal is to try to prevent the issuance of a check out of your escrow account for the property taxes that your personal check for 2018 has already paid.
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