The answer is, it depends.

A typical tax strategy used by homeowners to help lower their taxable income has been to pay property taxes in advance for the following year. However, due to the Tax Cuts Jobs Act (TCJA), this plan may no longer make sense.

For those living in low-tax states, accelerating your expenses will help increase your itemized deductions and consequently reduce how much tax you owe. Reversely, for those in high-tax states, the new policy changes under the TCJA eliminates these advantages.

How?

Two revisions have been made that directly impact this tax strategy.

  1. Increase in standard deductions for 2018 taxes
    • The standard deduction for married couples filing jointly doubled to $24,000
    • Head of households standard deduction revised to $18,000
    • Singles/ Filing Separate the standard deduction is $12,000

(This means fewer taxpayers will have a need to itemize.)

  1. Another revision includes the $10,000 limit on state and local tax (SALT) deductions. This includes property taxes and income or sales tax as well.

Then when does pre-paying your property tax make sense?

The only way to use this tax strategy to your advantage is if you qualify under these requirements:

  1. SALT expenses for 2018 must be less than the new limit of $10,000
  2. Your itemized deductions for 2018 must exceed the new standard deductions

If you have hit your $10,000 limit on income or sales tax (or any property tax payments), then paying for next year’s property tax in 2018 will be at no gain to you.

Example

For instance, let’s say a married couple filing jointly, incur:

  • $5,000 in state income taxes
  • $5,000 in property taxes
  • $18,000 in qualified mortgage interest
  • $4,000 in charitable donations

Making their total itemized deductions $32,000. Meaning they have reached their $10,000 SALT limit.

For them, pre-paying their next installment of 2018 property taxes of $5,000 won’t make sense because it will not decrease their tax bill.

However, if we take the same married couple, filing jointly, but assumed they lived in a state with no income tax – the outcome would change.

If they lived in a state with no income tax then paying their property taxes now could theoretically make sense because it would be within the SALT limit and help bump up their 2018 itemized deductions.

Bottom line, plan ahead

Before paying your property taxes, review your situation carefully to be sure it will provide a tax benefit.

And keep in mind that, just because prepayment will increase your 2018 itemized deductions, it doesn’t necessarily mean that’s the best strategy. For example, if you expect to be in a higher tax bracket in 2019, paying property taxes when due will likely produce a more significant benefit over the two years.

For help determining whether prepaying property taxes makes sense for you this year, contact our office adminteam@capatacpa.com . We can also suggest other year-end tips for reducing your taxes.