U.S. IRS Reiterates Position Limiting Deduction of Pre-Paid 2018 Property Taxes

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.

The latest IRS letter makes clear that it is not backing away from its earlier position. The correct answer will eventually have to be decided by the courts. 

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, 2017.

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 Attorney General.

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and Means Democrats sent a 5 March 2018 letter to the IRS disagreeing with its position and asking that the position be rescinded.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

How This Impacts Mobility

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.

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