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What will 2018 bring for Republicans and Democrats?
Only days after President Trump signed the new tax bill into law, homeowners are already scrambling to take advantage of current deductions and prepay their 2018 property taxes before the new rules take effect. Brenda Flanagan of New Jersey Public Television reports, then Mark Steber of Jackson-Hewitt Tax Service joins Hari Sreenivasan to explain how the new tax code will impact high-tax states.
The new tax laws are set to take effect on Monday.
Given that the president and Republicans in Congress just passed and signed the legislation days ago, some taxpayers are scrambling to try to squeeze in deductions, some for next year, before 2017 ends.
That's especially true in a number of municipalities, where people are standing in line to prepay their property taxes for 2018.
Let's look at what you need to know, and begin with this field report by Brenda Flanagan of New Jersey public television.
(CHEERING AND APPLAUSE)
While Republicans celebrated and called their tax bill historic, homeowners panicked and called their accountants in high-property-tax states like New York, California and New Jersey.
Phones and e-mails have been going off crazy, because a lot of people are hearing about the real estate tax deduction, hearing about all the changes, and wanting to know what to do.
That's because, in 2018, the Republican bill will cap property tax deductions at $10,000. But in Jersey, average property taxes exceed $10,000 in four counties. In fact, homeowners here pay the highest property taxes in the nation, more than $8,500, on average.
Anyone in New Jersey, that's got to be scary.
So, many homeowners, like Wayne DeFeo, are meeting with CPAs, looking to prepay next year's property taxes, to take advantage of the full deduction before it expires. It's kind of a loophole.
If I could prepay half of my property taxes for next year, to take advantage of it this tax year, based on what my accountant's told me, is I would save almost $1,000. And that goes to my pocket.
It's up to each and every taxpayer to make a decision how comfortable they feel paying real estate taxes in advance. But you should look at it. Everyone should look at it, because it's a one-time opportunity by December 31. It's a lot of money to leave on the table.
How much? Say you're single, with no kids, making $75,000. Your property taxes are $20,000. We figured that, for 2017, you will owe the IRS about $8,500. But prepaying the first two-quarters of your 2018 property taxes could knock that IRS bill down to about $6,000. You would save almost $2,500.
But accountants advise it won't work for everyone.
For people that make more than $200,000, they're caught up in Alternate Minimum tax, which basically disallows income and real estate taxes to get you back to a minimum level.
CPA Dan Connolly also warns some people may be tempted to borrow money to make those prepayments.
Some people are going on credit lines to pay for them, and then they're going to have to pay interest on the money that they borrow to prepay the tax. So the calculation is not that simple.
Regardless, municipalities from Elizabeth to Alpine, and here in the shore town of Belmar report residents are showing up with checkbooks to prepay at least the first two quarters of next year's property taxes.
We're walking them through the process of prepayment. We have our staff ready to accept those prepayments, process them properly, make sure it's all documented for anyone who comes in, so they're able to take advantage of the deduction this year in 2017.
Mayor Matt Doherty's prepaying his taxes. But besides working the loophole, lawmakers in several states are also looking for other ways to soften the blow.
Here in Jersey, one bill would increase property tax deductions for homeowners. But it'd cost the state $170 million in revenues.
Well, the bill would allow full deductibility of homeowners' property taxes on their state income taxes. And that will cut in half for most people the hit they're going to get by the Trump bill, which doesn't allow deductibility for property taxes over $10,000.
For the PBS NewsHour, I'm Brenda Flanagan, reporting from Elizabeth, New Jersey.
Some more questions and perspective about the changes to the tax code and end-of-the-year decision on property tax deductions.
Mark Steber is a CPA and chief tax officer for Jackson Hewitt Tax Service.
So, Mark, what are some of the factors that should go into figuring out whether you should make these payments now vs. later?
Well, your piece was excellent and spot on with several of the observations from some of your professionals.
Basically, don't think that one size fits all on this opportunity. It certainly works where it works, but where it doesn't, it can have the benefit of biting you pretty badly on the back end.
So the two things that I'm telling folks on this property tax acceleration idea is, one, make sure you have the money. Borrowing money to do a tax planning idea that might change even after the 1st of the year, not my best advice.
And the second thing is watch out for that Alternative Minimum Tax. Your other featured speaker said that these taxes are not deductible when you go in and compute that, as are not mortgage interest and a whole host of other items that you do to calculate Alt Min that.
So if you make this accelerated deduction, throws you into Alternative Minimum Tax, and you don't get a benefit, all might have been for naught.
So, have the cash. Watch out for Alt Min, but, most importantly, what we are telling our clients at Jackson Hewitt is consult with your tax adviser. Only they know your facts and circumstances and what to watch for and what your tax profile will look like for 2017 and for 2018, even given the new limitation on the property taxes.
There is a lot to look at, and you certainly don't want to run afoul of a benefit that you might need next year, even if you are in a high property tax area.
One of the things we have heard is that this is going to affect states like California and New Jersey, but this isn't a blue state/red state thing, is it?
No, it's not, and that is really kind of a mischaracterization.
Those states that you name certainly do have high property taxes, but I'm from Florida and I have friends in all the different states in the country, and many of them have high property tax locations. So it's really for anybody who has high property taxes. They should look at this.
But they should also look at their other factors as well. But this is not solely a New Jersey issue or a California issue or a New York issue. It's a whoever has property taxes more than $10,000, the new limit, that is where this is kind of applicable, because that is where you are going to get capped out in 2018.
What about the possibility that Congress could move forward to try to close this loophole retroactively, saying that everybody that went out of their way to stand in line and pay these now might not actually see the benefit?
Well, that is certainly a possibility, with the corrections bill that will come in after the fact to tweak up some of the areas that were not absolutely looked at in totality when they passed the law.
But I really wouldn't worry too much about a retroactive change, unless there is a great deal of abuse. And I think once folks take a look at this and see what some of the risks are, what some of the costs are, I don't see this really being an overwhelming opportunity for folks to take advantage of.
It is a lot of money up front for a tax benefit arguably in 2019, when do you your taxes. You really have to have a compelling set of facts and circumstances to do that. And some will do it, and it will make sense, but most people are taking a cautious look at the idea.
But where it makes sense, it makes sense. But it's not for everybody.
All right, Mark Steber of Jackson Hewitt, thanks so much.
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