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In a letter to the Attorney
General of New Jersey released 29 June 2018, the U.S. Internal Revenue
Service (IRS) restated and supported the position it took in December of 2017
that prepayments of 2018 property taxes in 2017 are allowable as 2017
deductions only if the 2018 tax has been assessed.
Following enactment of the Tax
Cuts and Jobs Act of 2017 (TCJA), which imposed an aggregate deduction limit of
$10,000 on state and local income, property, and sales taxes beginning in 2018,
many taxpayers sought to prepay 2018 taxes in 2017 hoping to achieve a full deduction
on their 2017 returns. The TCJA explicitly forbade such deductions for 2018
income taxes, but was silent as to property taxes.
Several states, including New
Jersey, facilitated prepayments of property taxes in one way or another. In New
Jersey, the governor issued an executive order requiring municipalities to
accept payments of estimated 2018 taxes postmarked on or before December 31,
Related: 4 States Sue U.S. Federal Government Over State & Local Tax Deduction Limit
The IRS issued an advisory on 27
December 2017 stating that such payments would be allowable as 2017 deductions
only if the tax was assessed in 2017. It cited authorities for that position,
which are repeated in the letter to the New Jersey Attorney General.
The Attorney General had
requested IRS guidance in a letter sent to the IRS 26 February 2018, disagreeing
with the IRS position. The IRS has now rejected the arguments made by the
However, this is far from the
end of the matter. A lively debate has taken place among tax professionals as
to whether the IRS position is correct. Eleven House Ways and Means Democrats
sent a 5 March 2018 letter to the IRS disagreeing with its position and asking
that the position be rescinded.
Related: Draft of New U.S. IRS Form 1040 Draws Mixed Reviews
The deductibility of state
property taxes is an issue that will affect the tax liability of many
transferees, and could affect the computation of gross-ups for taxable
relocation expenses. Companies with transferees relocating to or from high tax
states may be faced with year-end issues as to whether gross-up was adequate,
issues that will depend to some extent on whether the transferee is allowed a
deduction for early payments of property taxes.