The headquarters of the Internal Revenue Service in Washington in 2014. (J. David Ake/AP)
The Internal Revenue Service announced Wednesday that taxpayers can prepay their 2018 property taxes only if they have already received a tax assessment from their local government and they make payment by the end of the year.
The announcement clarifies who can prepay property taxes but also threatens to create confusion in state and localities across the country where taxpayers have been rushing all week to prepay property taxes after President Trump signed into law a new Republican tax bil.
[Can you save a lot of money by prepaying your property taxes? Key questions and answers.]
The tax legislation limits the value of the state and local tax deduction to $10,000 and bans prepayment of local and state income taxes. But it left vague whether people could prepay their property taxes.
That has set off a scramble among taxpayers to see whether they can pay those taxes this year and add them as a deduction when they pay their 2017 federal taxes in April 2018.
[The impact in the Washington region]
For individuals who have received tax assessments from their municipal governments, the IRS guidance should prove comforting. But for those who have already paid estimated property taxes and did not already have an assessment for 2018 from their local officials, the decision could prove confounding.
“If the property tax was assessed for this year and payment is still not due until next year, you can still make that payment early and it will be deductible,” said Bradley Heim, a professor at Indiana University who worked in the Treasury Department's Office of Tax Analysis under President George W. Bush.
States and localities will have to interpret the guidance for their residents and make clear what they will do should people need payments reversed.
Critics say that the last-minute confusion underscores the haste with which Republicans passed their tax bill, which was done in record time for such a significant piece of legislation. Other hiccups could come along in coming weeks as the IRS releases guidance on many other facets of the tax bill, the largest overhaul of federal tax law in three decades.
“This is not the way to do legislation that will massively impact the entire economy,” said Philip Hackney, a tax expert at Louisiana State University. “It sets off a flurry of action from people trying to save money, and they act as rash as the legislators who pushed this thing through.”
Despite the IRS’s clarification, questions remain over exactly what a municipality could do to allow its residents to qualify for the federal tax exemption. Counties across the country have widely different rules for assessing property taxes, and nobody has data on exactly how many have already done so for 2018, according to Andy Grewal, a tax expert at the University of Iowa.
The variation across the country may make it difficult for the IRS to enforce its ruling, tax experts said. With just a handful of days until the new year, many lawmakers may now try to hastily issue 2018 assessments to comply with the IRS’s guidelines.
“They only have a couple days, but if they want to protect their taxpayers they could change the assessment date of taxes,” Grewal said. “But retroactively changing the assessment date, that would raise some thorny legal questions.”
For instance, municipalities are supposed to consult local law before issuing the year’s property taxes, but they may not be able to do so this time in the rush to meet the new deadline.
Failing to do so might give the IRS some standing to reject those claims, but it’s not clear that the IRS would issue an unusual and cumbersome denial of thousands of taxpayers’ deductions.
“It would have to be a mass denial to everyone in the county who took that deduction, but that seems awfully administratively difficult to accomplish,” Heim said. “It’s really difficult to guess what will happen if folks don’t follow this ruling.”
Problems may also arise from counties that will not have their assessments done for 2017 until well into 2018 or even later. In these areas, a taxpayer would be unable to deduct taxes that were really leveled against them for months in 2017 -- even if they went to their local government and tried paying them ahead of time.
“The legal issue would be: ‘Is that a payment of a tax or is it just a deposit?,’” Grenwal said. “I’m not sure it’s a winning argument, but somebody could argue that they’re really paying taxes and should be able to deduct them.”
from Wonkblog http://ift.tt/2E1wALj
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