The Tax Advantages to Paying Property Taxes a Year Early

One of the financial advantages of home-ownership is the ability to deduct property taxes from your federal tax return. Homeowners throughout the nation average more than $3,000 each year in property taxes, with some higher-end homes in high-tax communities have property tax bills exceeding $10,000. Homeowners planning for changes in tax law or even with income adjustments, might consider paying property taxes early because it offers a bigger tax advantage to deduct it sooner. While this isn’t allowed in every situation, there are tax advantages to doing so when you can.

Can You Pay Early?

The Tax Cuts and Jobs Act of 2017 changed how much is deductible on federal tax returns for property taxes. It limits the amount to $10,000 paid in any tax year, starting in 2018, affecting the upper echelon of property taxpayers. While the change in the tax law made millions more consider paying property taxes early to take advantage of the 2017 rules where more was deductible, it shed light on when it is and isn’t allowed.

Neither the Internal Revenue Service nor state property tax boards prevent anyone from paying property taxes early. Early generally means paying a future year’s property tax before the start of the year. For example, you can pay property taxes for 2018 in 2017. However, you cannot deduct property taxes on federal tax returns unless you have received an official assessor’s bill for the tax in the next year. In other words, a taxpayer cannot estimate the 2018 tax payments to take the deduction, but if the 2018 bill has been received in 2017, then the amount paid is deductible to the extent of the tax code.

Benefit of Early Payment

If you are eligible to deduct the early property tax payment, there is one key tax advantage to do so. The amount paid increases itemized deductions. If itemized deductions are higher than the allowed standard deduction, taxpayers can significantly reduce tax liability for the year that payments are made.

This means the taxpayer needs to determine if the deduction is better to take now or later. In a situation where tax law is changing to reduce the ultimate deductibility of property tax, taxpayers are better off paying it early because it might not save on taxes in future years. It is also beneficial in a scenario in which a taxpayer anticipates income reductions in a future year. For example, a sole proprietor who anticipates retiring and closing his business in 2018, might choose to maximize deductions in 2018, by paying his 2019 assessed property taxes up to an aggregate of $10,000 because his 2019 income; thus, his tax liability is significantly reduced.

Disadvantages of Early Payment

Keep in mind the disadvantages for pre-paying property tax. The first disadvantage is paying it and later realizing you weren’t eligible for the deduction. The other disadvantage of making deduction-eligible pre-payments is that you lose the ability to take that deduction the following year. If for some reason your financial circumstances change and wanted to take the deduction, you can’t.

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