While Republicans celebrated and called their tax bill historic, homeowners panicked and called their accountants in high-property-tax states like New York, California and New Jersey.
“Phones and emails have been going off like crazy because a lot of people are hearing about the real estate property tax deduction, hearing about all the changes and wanting to know what to do.” said Gail Rosen, a CPA at Wilkin & Guttenplan P.C.
That’s because in 2018, the Republican bill will cap property tax deductions at $10,000. But in New Jersey, average property taxes exceed $10,000 in four counties. In fact, homeowners in the state pay the highest property taxes in the nation, more than $8,500, on average.
“Anyone in New Jersey, that’s got to be scary,” said Wayne DeFeo, a homeowner in Warren.
Homeowners like DeFeo are meeting with CPAs and looking to prepay next year’s property taxes to take advantage of the full deduction before it expires. It’s a kind of loophole.
“If I could prepay half of my property taxes for next year, to take advantage of it in this tax year, based on what my accountants told me, I would save almost $1,000. And that goes into my pocket,” DeFeo said.
“It’s up to each and every taxpayer to make a decision on how comfortable they feel, paying real estate taxes in advance. But you should look at it. Everyone should look at it, because it’s a one-time opportunity by Dec. 31. It’s a lot of money to leave on the table,” said Rosen.
How much? Let’s say you’re single, with no kids, making $75,000, your property taxes are $20,000. We figured that for 2017, you’ll owe the IRS about $8,500. But prepaying the first two quarters of your 2018 property taxes could knock that IRS bill down to about $6,000. You’d save almost $2,500. But accountants advise, it won’t work for everyone.
“For people that make more than $200,000, they’re caught up in alternate minimum tax, which basically disallows income and real estate taxes to get you back to a minimum level,” said Dan Connolly, a CPA and partner at Connolly & Co. P.C.
Connolly also warns some people may be tempted to borrow money to make those prepayments.
“Some people are going on credit lines to pay for them and then they’re going to have to pay interest on the money that they borrow to prepay the tax, so the calculation is not that simple,” he said.
Regardless, municipalities from Elizabeth to Alpine to Belmar report that residents are showing up with checkbooks to prepay at least the first two quarters of next year’s property taxes.
“We’re walking them through the process of prepayment. We have our staff ready to accept those prepayments, process them properly and make sure it’s all documented for anyone who comes in, so they’re able to take advantage of the deduction this year, in 2017,” said Belmar Borough Mayor Matt Doherty.
Doherty’s prepaying his taxes. But, besides working around the loophole, lawmakers in several states are also looking for other ways to soften the blow. In New Jersey, one bill would increase property tax deductions for homeowners. But it would cost the state $170 million in state revenues.
“Well, the bill would allow full deductibility of homeowners’ property taxes on their state income taxes. And that will cut in half for most people the hit that they’re going to get by the Trump bill, which does not allow deductibility for property taxes over $10,000,” said state Sen. Ray Lesniak.
“Gov. Christie said he would sign it. So there’s a little bit of an urgency for Governor-elect Murphy to tell us whether or not he’d support something like this, because if not, then we’d have to work real hard in this lame duck session,” said state Sen. Joseph Pennacchio.
“Everything has to be on the table. That’s not, by a long shot, not a crazy idea … That’s one that needs to be on the list to look at,” said Governor-elect Phil Murphy.
There’s one other possible complication for taxpayers trying to beat the deduction deadline. Congress may act to close the loophole and ban property tax prepayment.