Here's How Taxpayers Hope To Avoid A Hike In 2018

WASHINGTON, DC — When Republicans passed a major overhaul on the American tax system, they limited the very popular state and local tax deduction, which allows taxpayers to deduct what they pay in state and local property, income and sales taxes from the federal returns. The deduction, which previously had no limit, is now capped at $10,000 and can be any combination of property, income and sales taxes.

Most U.S. residents do not use this deduction. It is primarily relevant to people with high incomes in high-tax states like California, New York and New Jersey. But as the year comes to a close, localities are scrambling to find loopholes in the new tax bill and allow their residents who do use the deduction to avoid a tax hike in 2018.

To do this, states and municipalities are allowing and encouraging residents to pay their property taxes early. However, the IRS warns that there are limitations on this tactic.

"You can partially prepay or fully prepay and get your deductions for your property tax payment," Democratic Gov. Andrew Cuomo said in a statement to New York residents. "This device will postpone the pain for one year."

New Jersey Gov. Chris Christie, a Republican, sent a similar message to his constituents. He issued an executive order requiring local governments to accept prepayment on property taxes that are postmarked by Dec. 31, 2017.

“The action I took today will ensure that local governments are flexible and accommodating of their local property taxpayers as we transition to the new federal tax code for 2018," Christie said in a statement. "This executive order requires local officials to dedicate the resources and staffing to serve New Jerseyans who are planning in this way for their families and their futures."

The prepayment loophole is valuable because the Republican tax bill affects filers' 2018 tax bill, not their 2017 tax bill (which is due on April 15, 2018.) That means the cap on the state and local tax deduction doesn't apply to 2017 taxes. But filers who pay their 2018 state and local taxes in the year 2017 — that is, before Jan. 1, 2018 — can still deduct it from their 2017 tax bill without hitting the new cap.

But the IRS is throwing some cold water on enthusiasts of this strategy.

In a statement, the agency clarified that property taxes can only be prepaid — and thus deducted from taxpayers' 2017 tax bill — if they were assessed in 2017.

"A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017," the statement said. "State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed."

For example, if your town taxes your property on an assessment of its value from July 2017 to June 2018, you could prepay these taxes in 2017 and still use this deduction. You could not deduct prepayment for taxes assessed for the 2018-2019 period. Taxpayers hoping to make prepayments should check with their local governments or a tax professional.

It's also not clear how effective this strategy will be for some taxpayers. The Alternative Minimum Tax reduces the effect of taking large deductions, and it may end up thwarting some plans deduct multiple years of state and local taxes for a 2017 return.

According to The New York Times, about 75 percent of Americans can expect a tax cut in 2018 from the tax bill. However, many of the tax cuts for individuals and families will expire in several years, while the reduction in corporate taxes are permanent.

At the end of a decade, many families will experience a tax hike under the tax bill, according to analysts. Read more about the details of the tax bill.

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