WASHINGTON, D.C. -- Local governments offered more clarification on Thursday as to whether homeowners would benefit from prepaying their 2018 property taxes.
Because of the passage of the Republican tax reform bill, the amount homeowners can deduct state and local taxes (also known as SALT) from their federal taxes will be capped starting January 1.
Currently, there is no limit on the amount that can be deducted, but the limit on January 1 will be $10,000.
Many homeowners had been rushing to prepay their 2018 property taxes before the end of 2017 in hopes that they could have the unlimited deduction when they pay their 2017 federal taxes.
But late Wednesday, the IRS put out a statement about who would actually be eligible for the unlimited deduction.
Nicole Kaeding, an economist with the Tax Foundation, said taxpayers have to meet a two-part test.
"One, the taxes must be paid in 2017, but two, the taxes must also be assessed," added Kaeding.
Meaning if your local government has assessed 2018 property taxes in 2017 and you pay before the end of the year, you should be eligible for the deduction. However, if your local government does not assess 2018 property taxes until 2018, prepaying would not have the same benefit.
"The District of Columbia residents do seem to meet that definition. Individuals, however, in Montgomery County, Maryland, which just passed a law on Tuesday, or Arlington County, or in Fairfax County, Virginia, don’t seem so lucky. They do not seem like they will be able to meet that test," said
The Office of the Chief Financial Officer for Washington, D.C. put out a statement and said it believes the District meets that two-part test because 2018 property taxes were assessed in October 2017. They added homeowners could continue to pay online or at any District Wells Fargo location.
However, Montgomery County, the City of Alexandria, Fairfax County, the City of Fairfax, and Arlington County put out statements that said they believed their jurisdictions did not meet the IRS standards.
Some are allowing those who prepaid to request a refund.
But Kaeding adds, even those who are in jurisdictions that meet the IRS standard, other factors may mean they may not be eligible for a SALT deduction. Such as if you are subject to the Alternative Minimum Tax (AMT).
"Individuals that have paid the AMT in the past likely would get no benefit from this prepayment strategy. In addition, if you did prepay and now your SALT deduction is much larger than it has been in the past, you could trigger an AMT liability that you hadn’t in the past and in either of those scenarios, even if you did meet the IRS guidance on prepaying your property taxes, there would be no actual tax benefit to doing so," added Kaeding.
She added that anyone thinking about prepaying should consult a tax professional.