Prepaying property taxes for 2018 deduction? IRS says not so fast

Property owners rushing to pay their 2018 taxes early to claim a deduction one last time got a shock Wednesday when the Internal Revenue Service said doing so may not qualify for a tax break.

The IRS issued a guidance saying that those prepayments can only be deducted from 2018 taxes if the property is assessed by the end of this year. Many local governments, including Tarrant County, won’t complete those assessments until later in 2018.

The IRS announcement caused a stir across the country. Tarrant County Tax Assessor-Collector Ron Wright said that according to a legal opinion he received Thursday from the Tarrant County district attorney’s office, payments based on an estimated 2018 tax bill will not qualify for the deduction.

Last week, county officials decided to allow property owners to prepay their property taxes before a $10,000 cap on state and local tax deductions included in the new tax law begins in 2018.

“Leave it to the IRS. I’m so irritated with them it’s not even funny,” Wright said. “They always find a way to throw a monkey wrench.

“We are still going to accept prepayment, but we make no representation as to what the IRS will do. I think they really muddied the waters with their statement.”

Wright didn’t have an estimate on how many people had already prepaid their taxes but said “our lobbies are always full this time of year, but we’ve seen a larger crowd than normal.”

The Tarrant Appraisal District, the agency that sets the value on local property, typically issues its certified roll in July. Cities and school districts set their tax rates by September, with property tax bills issued by October, Wright said. Typically, those bills are not due until Jan. 31.

While there have not been any changes to Texas law relating to the new federal tax law, Wright had hoped that the county’s lawyers would tell him that his estimation of taxes would allow prepayments to qualify for one more deduction.

“I’m not saying what the value is; I’m just making an estimation of what the taxes may be,” Wright said before getting the legal opinion. “That is totally separate from setting the value [of property] by TAD.”

But the legal opinion dashed those hopes. Properties must be valued by Dec. 31, and the IRS guidance makes a clear distinction between an estimate and an assessment, Wright said.

“The language is pretty clear,” Wright said. “If they want to prepay, we’ll take it, but in our judgment it will not be deductible. ... Our legal opinion is that we cannot issue a statement and call it an assessment.”

The tax deduction is very popular in states where taxes are higher. In Virginia, more than 37 percent of tax returns included the deduction in 2015, while in Texas only 23 percent of taxpayers claimed the tax break, according to reporting by The Washington Post.

This report includes material from The Washington Post and Bloomberg.

This story was originally published December 28, 2017 at 11:27 AM with the headline "Prepaying property taxes for 2018 deduction? IRS says not so fast."