Accelerating deductible expenses, such as real estate tax on your home, into the current year typically is a good idea. Why? It will defer tax, which usually is beneficial. Prepaying real estate tax may be especially beneficial this year, because proposed tax legislation might reduce or eliminate the benefit of the real estate tax deduction beginning in 2018.
The initial version of the House tax bill would cap the real estate tax deduction for individuals at $10,000. The initial version of the Senate tax bill would eliminate the real estate tax deduction for individuals altogether.
In addition, tax rates under both bills would go down for many taxpayers, making deductions less valuable. And because the standard deduction would increase significantly under both bills, some taxpayers might no longer benefit from itemizing deductions.
2017 year-end planning
You can prepay (by December 31) real estate taxes that relate to 2017 but that are due in 2018 and deduct the payment on your 2017 return. But you generally can’t prepay real estate tax that relates to 2018 and deduct the payment on your 2017 return.
Prepaying real estate tax will in most cases be beneficial if the real estate tax deduction is eliminated beginning in 2018. But even if the real estate tax deduction is retained, prepaying could still be beneficial. Here’s why:
- If your real estate tax bill is very large, prepaying is likely a good idea in case the real estate tax deduction is capped beginning in 2018.
- If you could be subject to a lower tax rate in 2018 or won’t have enough itemized deductions overall in 2018 to exceed a higher standard deduction, prepaying is also likely tax-smart because a real estate tax deduction next year would have less or no benefit.
It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. Since there are a few other caveats to deducting real estate taxes, please give us a call so we can help you make the best decision based on tax law change developments and your specific situation.