At 2017’s last light, Americans came out in droves to prepay property taxes. By New Year’s Eve, some 126,000 had come to Cook County to pay the first installment of 2017 taxes, even though these taxes were not due until March of 2018.
The motivation for so many “early bird” taxpayers was the nation’s transformed tax law. Until Dec. 31, 2017, itemizers of income tax deductions could subtract the sum of all property taxes paid in a year from their total taxable income. Starting in 2018, however, deductions were downsized to $10,000 per year for state and local taxes. The “worm” that attracted the early bird taxpayers was the prospect of getting the bigger breaks one last time, before the revised regime on taxes took effect.
But reports from the press, plus pronouncements from the IRS, cast doubt on whether the early outlays for taxes could be deducted on 2017 tax returns. As we approach April’s due date for such returns, however, a new Treasury Department dispatch has shed some light on the subject.
Development of doubts over deductibility occurred because the new tax law does limit the deductibility of some prepaid taxes. But a close reading makes it clear that the law’s limitation language is focused on folks who prepaid income taxes. It says nothing about prepaid property taxes.
Nonetheless, the law’s prepayment prohibitions provide an important analogy for property tax prepayments. Under the law, income tax payments in 2017, if prepaid for 2018, cannot be deducted. But 2017 income tax payments made for 2017 taxes are deductible.
Extending this logic to real estate taxes implies that deductions for prepaid property taxes are permitted in Illinois. This is because we pay property taxes in arrears in Illinois. Our 2016 property taxes were due in 2017, and our 2017 taxes are due in 2018. Thus those who prepaid their property taxes by Dec. 31 were making 2017 property tax payments in the year 2017.
Illinois Congressman Peter Roskam made this point in a missive to a man named Mnuchin, the U.S. Treasury Secretary. Roskam referred to a December IRS advisory that provided one example in which prepaid property taxes were deductible, and another in which they were not. He suggested that the example of denied deductions for property tax prepayments did not apply to Prairie State people, as Illinois pre-payers had paid property taxes for 2017.
On March 28, Roskam received a response from the Treasury Department. In the view of the department, December’s IRS advisory “addressed payments made by taxpayers in 2017 for 2018 property taxes.” It added: “As a general matter, taxpayers are permitted to deduct property taxes that were both paid and imposed in 2017.”
The March memorandum seems to support the deductibility of prepaid property taxes in Illinois, but is perplexing on one point: Were the Cook County property tax bills, due in March, 2018, “imposed” in 2017? The memo’s meaning is not clear on this point; it could be argued either way.
What is clear, however, is that Congress could have constrained the deductibility of property tax prepayments, but did not. The Treasury Department could have contradicted the congressman’s letter, but did not. And there are other circumstances, such as when a property is sold, where the IRS has permitted property tax payments due in one year to be deducted in a prior year.
Given all this, and the likelihood that thousands of residents from Cook County will claim prepayment tax deductions, I think it unlikely that the IRS will seek to stop local taxpayers from deducting December-made prepayments. Ultimately, however, taxpayers will have to make their own deduction decisions. I hope this article helps taxpayers make informed decisions about these meaty matters.
Ali “Alliteration” ElSaffar, author of this article, is the authentic assessor of Oak Park Township and authority on all things taxable.