Property Taxes

IRS Squashes Most State SALT CAP Workarounds

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When the Tax Cuts and Jobs Act (“TCJA”) was passed in late 2017, the standard deduction was increased and certain itemized deductions were eliminated or capped as an offset. One of the most noteworthy is the State And Local Tax (“SALT”) deduction, which allows taxpayers to deduct for Federal tax, what they pay in state/city income tax and property taxes on their residences. For many mid-upper income taxpayers in high-tax states, these deductions were already limited by the Alternative Minimum Tax (“AMT”) under prior law. Under the TCJA, SALT deductions are now limited to $10k per year for both single and married taxpayers. To give a real world example, if you make $150k and live in a state with a 6% effective tax rate, you’re $9k of state income taxes are still deductible, but only $1k of property taxes would be deductible on top of that.

Some states have taken action to try to circumvent the SALT limits by enacting laws that allow the creation of charitable funds to which taxpayers can donate money and receive a state income or property tax credit offsetting the amount “donated”. CT, NY, and NJ have passed laws that do this, while CA, IL, and RI had pending legislation as of June. Others are definitely looking into it. In late May, the IRS released a statement that they would be proposing regulations that would emphasize “substance over form” in these types of arrangements, essentially reminding everyone that a charitable contribution for which you get a tax credit is just really a tax paid and not a charitable contribution. Yesterday, the IRS released new regulations as promised. They also released a summary statement (below), which captures the essence of the regulations. That is, if you make a contribution to one of these charitable funds and receive a tax credit in return, the amount of the credit has to be subtracted from the contribution to determine your deductible amount. In other words, the work around created by these states won’t help.

The regulations go into effect on 8/27/2018, though the IRS points out that they’re not really a change of prior law (one was always required to subtract the benefit received from a charitable contribution to arrive at the deduction), but just a clarification. Technically though, you could make the argument that the law was previously unclear and that if one made a contribution pre-8/27 to one of these funds, it should be treated as a charitable contribution. The odds of audit increase in doing so, and there’s a decent chance that the IRS would nix the contribution, but for those who want to take a shot, that shot is probably available. Of course before doing so, you should of course check with a CPA, EA, or tax attorney to get a qualified tax opinion on the matter. The point is moot in most locations, because most states haven’t enacted laws that allow these types of funds to be set up. Even NJ and CT, who have enacted laws, have not, to my knowledge, set up the funds administratively. Why some municipalities in NY may have set them up (Scarsdale being one), most don’t seem to be available there either. If you have the option of making a contribution to one of these charitable funds in your state (meaning they passed legislation allowing the funds and the state or municipality actually set one up to receive money already), AND you’re comfortable making the claim that the limits imposed by the IRS regulations are new rather than clarifying existing law, then it would benefit you to make the contribution before 8/27. For all others, I don’t believe there’s any action to take on this.

You should also be aware that NY, NJ, MD, and CT have sued the Federal government over the SALT deduction caps as being unconstitutional. A few states have also threated that they will fight any IRS regulations that attempt to limit workarounds (e.g. the regulations that were released yesterday). I’m definitely not a legal expert, but it feels like this one is going to drag on for a very long time until we have a firm answer. With that said, the law of the land as of 8/27 (and probably before) is that if you make a charitable contribution and receive a tax credit in return, your Federal deduction is limited to the difference (in most cases, see below for details).

Lastly, existing programs that allow contributions to education or medical charitable funds in exchange for tax credits (e.g. GA’s GOAL program) are also impacted by this. The IRS has stated that it previously let those go because if the charitable contribution wasn’t made, then the state income tax paid would be higher and that was previously deductible for most tax payers (except those in AMT) anyway. You can still contribute to those funds and get a state tax credit for doing so, but the Federal charitable deduction is no longer available, at least starting 8/27.

From the IRS:

“

Treasury, IRS issue proposed regulations on charitable contributions and state and local tax credits

WASHINGTON — Today the U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations providing rules on the availability of charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state or local tax credit.

The proposed regulations issued today are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. The proposed regulations are available in the Federal Register.

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.

The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.

Treasury and IRS welcome public comments on these proposed regulations. For details on submitting comments, see the proposed regulations.

Updates on the implementation of the TCJA can be found on the Tax Reform page of IRS.gov.

“

IRS Statement Re: Prepaid Property Tax

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Yesterday, the IRS issued this statement with regard to the tax deductibility of prepaid property tax.  In it, they state that the property tax must be both assessed and paid in 2017 in order to be deductible in 2017.  The statement is just a reminder/clarification, not a new rule.  It follows with what I wrote in my last post about prepaying property taxes…  “Be aware though that in most cases, if the county accepts the prepayment as a deposit placed in an escrow account, it is not considered “paid” for Federal tax purposes.  It has to be paid against a levied tax to be deductible.”  If there is no tax yet, then your county could just be putting your prepayment in a suspense or escrow account and that is definitely not deductible.  If your tax has not yet been assessed, then there is no tax bill to prepay and that means your situation is the same as the 2nd example in the IRS statement.  Clearly not deductible.  If the tax was already assessed and payment isn’t due until sometime in 2018, or if they are taking your payment, levying a tax to offset it, and applying the payment against a levied tax (with amount not finalized, but known to be at least as much as last year), then that should be deductible.  I highly doubt many counties are going through that level of trouble though.  Most likely, either the tax has already been assessed and you’ve been notified of it, in which case payment would be deductible if make by 12/31/2017, or the tax has not been assessed and is not deductible for 2017, regardless of when it is paid.

Pre-Paying Property Taxes

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For those of you who are looking into making extra property tax payments in 2017 per this previous post in an attempt to make payments deductible in 2017 that would may not be deductible for 2018, I compiled a list of relevant (to my clients) states and their policies on prepayment.  In some states, even if the official property tax bill(s) for calendar year 2018 haven’t been published, they will accept pre-payment.  Be aware though that in most cases, if the county accepts the prepayment as a deposit placed in an escrow account, it is not considered “paid” for Federal tax purposes.  It has to be paid against a levied tax to be deductible.   This information is posted for reference only and is not a substitute for communicating directly with your tax collector and/or a CPA, EA, or tax attorney.  Use it as a guide to get started, not as the law.  Here’s what I’ve found so far:

California: taxes are managed at the county level but it appears that for all counties payment #2 for fiscal 2018 is due in early 2018 (payment #1 was due in late 2017).  These bills have been published and the amounts are known.  If you want to make a pre-payment, simply pay your 2nd payment prior to 1/1/2018.

Georgia:  taxes are managed at the county level.  For Dekalb and Cobb counties, there is no mention of prepayment of taxes for 2018 on their websites.  They just collected 2017 taxes in the Fall of 2017, so there is no assessment nor bill for 2018 yet.  However, they may still accept a payment for 2018.  Call the county tax office for details.  For Fulton county, due to issues I don’t fully understand, their 2017 tax bills were issued later than usual.  Residents in the City of Atlanta have a due date of Dec. 31, while residents in Fulton County have a due date of Jan. 15, 2018.  Pay by 12/31/2017 if you want the payment to count for 2017’s Federal taxes.  For 2018 pre-payments, again, call your county tax office.

Illinois: taxes are managed at the county level.  In Cook county, taxes are paid in arrears.  2016 taxes were paid in 2017.  2017 taxes are due 55% on 3/1/2018 and 45% on 8/1/18.  The county website indicates that they are now accepting prepayments for the 3/1/2018 portion, but makes no mention of the 8/1/2018 installment.  Call your tax collector for more detail if you’re interested in paying beyond the first installment.

Maryland – taxes are managed at the county level.  For Baltimore County, tax payments are divided into two installments.  The first installment is due on July 1 of the tax year and may be paid without interest on or before September 30 of the tax year. The second installment is due on December 1 of the tax year and may be paid without interest on or before December 31 of the tax year.  So, all tax bills for 2017 should be paid by end of calendar 2017.  I haven’t found any information about pre-paying 2018 taxes in Baltimore County, but Howard county just announced that it is accepting pre-payments for 2018 and will hold those payments in escrow until bills are generated.  I expect other counties to follow suit.  Contact your tax collector for more details.  Be aware though that in most cases, if the county accepts the prepayment as a deposit placed in an escrow account, it is not considered “paid” until they accept it against an levied tax, so you may still not get a deduction for it.

Michigan – taxes are managed at the county / city level.  For Detroit and the rest of Wayne county, tax bills are divided into two installments.  The first is due 8/15 and the second is due 1/15 of the following year.  You can make your 1/15 payment by 12/31 for it to count toward 2017 Federal taxes.  I haven’t found any information about pre-paying 2018 taxes so call your county tax collector to inquire.

Minnesota:  taxes are managed at the county level, but at least for Hennipen county, they are accepting prepayments based on the amount stated in your proposed property tax (Truth in taxation ) notice sent in November 2017.  Payments must be received (not postmarked) by the county by 12/29/17 to process for 2017 and they may be made in person or by mail.  Other counties probably have similar policies so check with your county tax collector if you want to pre-pay.  For Hennepin County, see their website for more info.

New Jersey: the annual property tax bill is due 25% each quarter on 2/1, 5/1, 8/1, and 11/1.  I believe you should already know the 2/1/18 and 5/1/18 payment amounts so those could easily be prepaid by 12/31/2017 if you want them to count for 2017 Federal tax.  I have no information about pre-paying beyond 5/1/18.  Call the county tax office for more info.

New York: there are two types of tax bills each year: 1) School and 2) Municipal and County.  School tax bills are typically mailed in Sep each year, with due date varying by district.  Municipal/County bills are typically mailed in Jan each year, with due date varying by locale.  If your School tax bill hasn’t been paid yet, you can definitely due that by 12/31/2017 if you want it to count toward 2017 Federal tax.  For the Municipal/County bill, call your tax office and ask if they can give you the amount that will be on the January 2018 bill and if you’re allowed to pay it by 12/31/2017.  There is no mention on state websites I looked at about pre-paying Municipal/County taxes for the following year.  That would be taxes not due until 2019 so I doubt that would be allowed, but check with your county tax office to inquire.

Update 12/23 – per Jeff Levine, CPA via Twitter: ” Interesting… NY’s Governor Cuomo has signed an executive order allowing the early payment of 2018 property in order to help New Yorkers impacted by the ‘s new SALT restrictions “

North Carolina: taxes are managed at the county level.  I checked Mecklenberg and Union counties and both show due dates for 2017 tax of September 2017, but no interest will be due if paid by 1/5/2018.  If you want your 2017 tax payment to count for 2017 Federal tax, pay by 12/31/2017.  For 2018 prepayments, policy seems to vary by county but I was able to verify that both Mecklenburg and Union counties are accepting pre-payments by check with parcel number and “prepayment” noted on the check.  Incidentally, I’m writing this at 3pm on 12/21 and Mecklenburg County issued their policy at about 2:30pm on 12/21.

Pennsylvania – taxes are managed at the county / city level and the procedures vary greatly by municipality.  In Philadelphia tax bills are mailed in December for the following year and are due in March.  So you can definitely pay 2018 property tax bills in 2017 if you make payment by 12/31/2017.  In Delaware County, bills are mailed 2/1 and are payable at a slight discount through 4/1, full amount through 6/1, and with a 10% penalty through 12/31.  Call your tax collector to inquire about prepaying the following year’s taxes if you wish to do so.

South Dakota – Property tax bills are divided into two payments.  The first half of the property tax payments are accepted until April 30th without penalty. The second half of taxes will be accepted until October 31st without penalty.  So 2017 taxes have already been paid.  I haven’t found any information about pre-paying 2018 taxes so call your property tax collector to inquire.

Texas: 2017 property taxes are due 1/31/2018.  If you want them to count as a deduction for 2017 Federal tax, pay them by 12/31/2017.  There is no mention on state websites I looked at about pre-paying 2018 taxes.  That would be taxes not due until 2019 so I doubt that would be allowed, but check with your county tax office to inquire.

Virgina – taxes are managed at the county level.  Most counties seem to have tax due in two installments during the calendar year.  The counties I researched, including Fairfield County appear to be accepting prepayments of 2018 property taxes.  They need to be paid (not postmarked) by 12/26 to be credited as paid in calendar 2017.

Washington: 2017 tax bills have already been paid.  It is against state law for county tax collectors to accept payments for 2018 taxes during calendar 2017 per the Kings County website.

Calling your city/county tax collector and specifically asking if they will accept prepayment (and by what method) is the best way to get an accurate answer.  Many counties still appear to be figuring this out, so there’s a lot of changing / stale information out there.

Remember, if you’re in AMT for 2017 already, without the additional payment, then this will not help you.  But, the only way it hurts you is if the 2018 tax law changes again and would have made the payment deductible in 2018 (seems like a low probability), if your state/local income/property tax deductions would be less than $10k in 2018 (meaning you could have deducted the property taxes in 2018 instead), or if it’s tying up money you otherwise need for something else, leading you to take on debt or make other inefficient financial decisions.  So, if you can pre-pay your 2018 property taxes, unless you know for sure that it won’t help you to do so, you can consider doing it.

Other (Less Urgent) Things To Do Regarding The Tax Bill (TCJA)

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The following is a quick brainstorming list of things to think about doing if/when the TCJA becomes law.  They don’t need to be done before the end of 2017 so I carved them out separately from my previous post.

  1. Update your tax withholding to account for your new level of deductions. Note that IRS guidance on this may be delayed until late Jan / early Feb due to the complexity in calculations.
  2. Payoff HELOC debt if the loss of tax deductibility makes the after-tax interest rate cost prohibitive vs. other options.
  3. Revise estate plan (if necessary) to account for bigger exemption. Consider lifetime gifting plans to take advantage of the bigger exemption if estate tax may be an issue for you in the future.
  4. Increase 529 contributions to account for private K-12 expenses if you know you will incur those expenses.
  5. Keep in mind that alimony will not be deductible to the payer / taxable to the receiver starting with divorces that take place after 12/31/18 (the bill gives one extra year to prepare for this).
  6. If you have any children with financial accounts in their names, review the new “kiddie tax” rules and plan accordingly as their tax system has shifted to follow the trusts and estates rates.
  7. If you have an AMT credit, likely due to the exercise of an Incentive Stock Option, without a corresponding sale in the same year, prepare for that credit to get “released” more quickly (i.e. larger credit each year until fully used).
  8. Note that the floor for deducting medical expenses in 2017 and 2018 only, is changing from 10% to 7.5% (if you’re able to itemize). For some, this may mean tracking their out-of-pocket expenses and providing them to their tax preparer at tax time.  Again, this is retroactive and applies to 2017.
  9. Since unreimbursed employee expenses are no longer deductible, the days of keeping mileage logs to take a tax deduction for use of your vehicle for work as an employee are over (unless required for your employer to reimburse you). In a related note, if you use your car for work as an employee (outside of commuting) and your employer doesn’t pay for that mileage, it’s worth discussing that with them since you are no longer going to be able to deduct the mileage for tax purposes.
  10. If you own a business, client entertainment is no longer deductible. Meals are still 50% deductible.  Keep that in mind when setting up events if the tax treatment matters.
  11. Employers can no longer reimburse employees tax-free for moving expenses. Any moving expense that an employer pays will be considered taxable income.  If you’re signing on with a new employer and they say they’ll pay for moving expenses, ask them to “gross up” those payments such that you are made whole after-tax.  If they refuse, note that they’re really only paying / reimbursing you for 55-80% of the net moving cost.

What To Do (or not do) In 2017 Regarding The Tax Bill (TCJA)

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The House and Senate have now passed the tax bill (though the House needs to vote again after some minor amendments in the Senate) and then it will be on its way to the President for signature.  While anything is possible, and the odds of the President signing in January rather than December have increased dramatically, it seems safe to assume that the bill will eventually become law.  There’s not a ton of time left to take action and there aren’t a lot of people who can take any action to take advantage of / avoid the disadvantages of the new tax law.  In this post, I’ll outline what you might be able to do, why you might be able to do it, and (maybe most importantly) why it may not work in certain situations.  These are general rules.  Proceed with caution.  Things can get very complicated and unintended consequences are possible.  The bill has not yet become law and there is some small risk that something prevents it from becoming law which means that actions you take under the assumption that it will become law may backfire.  I tried to keep this list simple, but unfortunately, there’s just no way to do that while providing enough actionable information.  Taxes simply aren’t simple.  Thanks Congress!

Consideration #1

Because: Federal tax rates are falling for every tax bracket in 2018,

Consider: Deferring income to 2018 from 2017 when you have the ability to do so,

Unless: You’re going to have substantially more income in 2018 than 2017 that could push you up to the next tax bracket OR you’re able to deduct state income taxes this year that you won’t be able to deduct next year (see below) and those state income taxes cause more tax savings than deferring the income to a lower federal rate year.

Examples:

  • avoid exercising non-qualified employee stock options in December that could be exercised in January 2018 (all else being equal)
  • contribute more to your 401k in the final payroll of 2017 and less in 2018 (but not less than the match amount),
  • defer some end of year revenue if possible if you’re self-employed or have a side job, or accelerate some expenses that you can take in 2017 instead of 2018 (including equipment purchases that would qualify for Sec 179 immediate expensing). This is especially important if your business would qualify for the 20% deduction on pass-thru income in future years.
  • perform deductible repairs / maintenance on rental properties in 2017 that you were considering doing in 2018.

Consideration #2

Because: Federal tax rates are falling for every tax bracket in 2018,

Consider: Accelerating deductions to 2017 from 2018 when you have the ability to do so since they will have a larger impact in reducing your taxes in 2017,

Unless: You’re going to have substantially more income in 2018 than 2017 that could push you up to the next tax bracket OR those deductions wouldn’t provide as much (or any) benefit in 2017 as they would in a future year due to the Alternative Minimum Tax (AMT) in 2017, or because you can’t itemize in 2017.

Examples (but see below for limitations):

  • Pay any state income tax that you might owe for 2017 via an estimated tax payment before the end of 2017. Note: this won’t work if you’re already “in AMT” for 2017 and you have to reasonably believe that you owe what you pay (can’t just pay an extra amount in 2017 to deduct it Federally and then receive a big state refund in 2018 and take it as income Federally at a lower tax rate).
  • Pay your Jan 1st mortgage payment prior to the end of December 2017 (your mortgage lender should report the interest for that payment on your 2017 1098), though most people do this already.
  • Pay outstanding property tax bills that aren’t due until some time in 2018 before the end of 2017 (this is only relevant in certain jurisdictions that bill in one year but set the bill’s due date in the following year). Note: this won’t work if you’re already “in AMT” for 2017 and you generally can’t prepay future year property tax bills that haven’t been generated yet.
  • Make additional charitable contributions in 2017 that you would have otherwise made in a future year or consider starting a Donor Advised Fund which allows you to make a lump charitable contribution into a fund, take the full deduction this year, and then distribute to charity in future years as you see fit.
  • Take any Miscellaneous Itemized Deductions in 2017 that you would have otherwise taken in a future year (see link for list). Note: this won’t work if you’re already “in AMT” for 2017.

Comment: How do you know that you’re “in AMT” for 2017?  If your income and deductions are similar in 2017 than they were in 2016, you can use your 2016 taxes as a guide.  Check line 45 of your 2016 Form 1040.  If there is a number on it, you’re “in AMT” and assuming the same situation in 2017, you will not benefit from those items above marked as not working if you’re in AMT.  If there’s no number on line 45 it means you likely wouldn’t be in AMT if you didn’t pay additional state income / property taxes or those items that would be considered Misc. Itemized Deductions.  But, if you do make those extra payments, it could push you into AMT.  To determine how much room you have until you hit AMT, check with your tax preparer who should be able to go back to your 2016 return and slowly increase your deductions that aren’t deductible for AMT until you hit AMT.  That will give you an approximate limit to the extra payments you can make in 2017 before hitting AMT.  If your 2017 situation is different from 2016, then the only way to know how much room you have for additional payments in 2017 is to prepare a mock tax return for 2017 which is not an easy task as it means gathering all the information that would be on your tax documents (W-2, 1099s, 1098s, etc.) without actually getting your tax documents in the mail.

Consideration #3

Because: The standard deduction is increasing substantially starting in 2018, fewer and fewer people will be able to itemize, meaning that their deductions won’t provide any benefit above the standard deduction. To estimate whether you’ll be able to itemize or not in 2018, add up the following for 2018 (use your 2016 Schedule A as a guide if your situation is going to be the same:  1) state/local taxes = the sum of Line 5 + Line 6 of your Schedule A, but only $10k as a max, 2) mortgage interest = Line 15 of your Schedule A (but back out any mortgage interest that’s associated with a HELOC, 3) charitable contributions = Line 19 of your Schedule A.  If you are single and the above adds up to less than $12k or if you’re married filing jointly and it adds up to less than $24k,

Consider: Accelerating deductions to 2017 from any future year.

Unless: those deductions wouldn’t provide any benefit in 2017 due to the Alternative Minimum Tax (AMT) in 2017, or because you can’t itemize in 2017.

Examples: Same as Consideration #2

Comment: Same as Consideration #2.

Consideration #4

Because: The deduction for state/local taxes paid is going to be limited to $10k per year (both Single and Married Filing Jointly!), which includes state/local income taxes, sales taxes, and property taxes,

Consider: Accelerating deductions to 2017 from 2018 for state/local income/sales taxes or property taxes,

Unless: those deductions wouldn’t provide any benefit in 2017 due to the Alternative Minimum Tax (AMT) in 2017, or because you can’t itemize in 2017.  Note that if the total of your state/local tax deductions in future years will be less than $10k, the only benefit here is that which is described by #2 above.

Examples (note that none of these work in AMT):

  • Pay any state income tax that you might owe for 2017 via an estimated tax payment before the end of 2017. Note that the tax bill specifically outlaws pre-paying 2018 state income taxes.  They would not be deductible in 2017 and would instead be treated as paid in calendar 2018 so that the system can’t be gamed.
  • Pay outstanding property tax bills that aren’t due until some time in 2018 before the end of 2017 (this is only relevant in certain jurisdictions that bill in one year but set the bill’s due date in the following year). You can only do this if the bill has already been generated.  Also, for those who pay their property taxes through an escrow account, you can still make a payment out-of-pocket.  Your escrow company will eventually make the same payment and it should be refunded back to the escrow account or back to you at that time.  If it goes back to the escrow account, your next escrow reconciliation will pick up the overpayment and refund it back to you.
  • If you live in a state with no income tax and you instead deduct sales taxes, and you’re planning to buy a big ticket item (car, truck, boat) soon, do it before the end of 2017 so you get the additional sales tax deduction in 2017.