Two days left in 2017 – and there is a massive confusion over the prepayment of 2018 property taxes. I was among the many tax advisors advocating FOR prepayment – see my blog post on last-minute tax moves for 2017 where I mention the reason. A bunch of states and municipalities announced that they would accept 2018 prepayments.
Then a widespread panic happened after the IRS published this last-minute warning that 2018 prepayments will NOT be deductible.
For example, see this announcement by Texas Senator Paul Bettencourt, best known as former Harris County Tax Assessor-Collector.
Confusing, isn’t it? This is mostly because we all say “2018 prepayment” – but we talk about different things! So, let’s sort it out.
What is prepayment of property tax?
Obviously, it is paying early, right? But how early – that’s the key!
Taxes are assessed at different times, depending on where you live. Most states and municipalities assess them in arrears – which means backwards. For example, 2017 taxes for Harris County are formally assessed around October 2017. The county sends out bills, and the bills are due by January 31, 2018.
In contrast, 2018 taxes will not be assessed until October 2018.
So, in December 2017 you have TWO future taxes to discuss:
- 2017 taxes that have been assessed (you know the exact amount) but are not due until next month
- 2018 taxes that have NOT been assessed yet (you do NOT know the amount)
What the IRS says is: you CAN prepay the first, but you CANNOT prepay the second.
But my state / county / scholl district operates differently
I hear you. Every tax department uses different timelines. This is how you sort out this mess.
According to the IRS, you will be fine if the tax has been assessed. It does not matter when is the deadline to pay it. What matters is that there is already an assessment: the exact amount of tax that you will owe.
If you have this number – go ahead and prepay safely.
You can safely prepay taxes that have been officially assessed
Then what kind of prepayment is prohibited by the IRS?
The guesstimate kind.
What many people decided to do is to make an estimated payment for the future, yet unknown, tax for the 2018 calendar year. The tax departments are usually happy to accept these payments and place them in escrow – until the future time when taxes will be assessed.
Then your prepayment will be applied towards your tax, and you will be billed for the shortage if any. Don’t ask me what would happen if you overpay – it will depend on each municipality’s rules.
This type of prepayment is what the IRS does not want!
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So, is that announcement by the IRS the final rule of law?
I’ve been involved in a discussion of this issue between my peer tax professionals on BiggerPockets.
We agreed that it’s debatable whether the IRS interpretation of the law is correct. In other words, even if you disobey the IRS announcement and prepay 2018 NON-assessed taxes – they may be legally deductible!
However, if you take this route, be warned that you’re asking for a fight with the IRS. You might win, especially if you have someone like me fighting on your behalf. But you may also decide that the fight is not worth it. Your call.