Prepaid 2018 Real Property Taxes as a Tax Strategy | Tax Lawyers News

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The Tax Cuts and Jobs Act of 2017 radically changed the US tax system with respect to deductible state and local income taxes, including real property taxes. Starting tax year 2018, real estate, person property, income taxes and sales taxes are deductible only up to $10,000. This means that people with high property taxes have a big problem – they have an expense that is no longer deductible. A question arises for tax attorneys – can these taxpayers use prepaid 2018 real property taxes to lower their 2017 tax liability?

This issue of prepaid 2018 real property taxes is the subject of the latest IRS advisory issued on December 27, 2017. Let’s explore this advisory in more detail.

Prepaid 2018 Real Property Taxes That Were Assessed and Paid in 2017

The IRS advised that prepaid 2018 real property taxes may be deductible in 2017 under specific circumstances. In particular, the IRS stated that, in situations where 2018 real property taxes were assessed and paid in 2017, such prepaid 2018 real property taxes may be deductible.

Prepaid 2018 Real Property Taxes That Are Not Yet Assessed But Paid in 2017

On the other hand, if your real property taxes for 2018 were assessed only in 2018, the prepayment in 2017 will not be deductible in 2017. 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.

Examples of Deductible and Non-Deductible Prepaid 2018 Real Property Taxes

The IRS provides the following examples of deductible and non-deductible prepaid 2018 real property taxes:

Example 1: Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017 – June 30, 2018. On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.

Example 2: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018. County B intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.

2013 Standard Mileage Rates

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On November 21, 2012, the Internal Revenue Service issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56.5 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate. The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

AMT Exemption Amounts for the Tax Year 2011

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The Alternative Minimum Tax (the “AMT”) attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. Congress created the AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.

Unfortunately, because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

You may have to pay the AMT if your taxable income for regular tax purposes, plus any adjustments and preference items that apply to you, are more than the AMT exemption amount. Congress sets the AMT exemption amounts are by law for each filing status.

For tax year 2011, Congress raised the AMT exemption amounts to the following levels:

$74,450 for a married couple filing a joint return and qualifying widows and widowers;
$48,450 for singles and heads of household;
$37,225 for a married person filing separately.

Moreover, the minimum AMT exemption amount for a child whose unearned income is taxed at the parents’ tax rate has increased to $6,800 for 2011.

Contact Sherayzen Law Office for Tax Planning Advice

If you are potentially facing the AMT, contact Sherayzen Law Office for tax planning advice. Our experienced tax firm will review the facts of your case and identify the available strategies to make sure that you do not overpay federal taxes.

IRS Announces 2012 Standard Mileage Rates

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On December 9, 2011, the Internal Revenue Service issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 55.5 cents per mile for business miles driven;
  • 23 cents per mile driven for medical or moving purposes;
  • 14 cents per mile driven in service of charitable organizations.

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.

Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

IRS Begins Processing Tax Forms Affected by Late Tax Changes

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Today, the IRS announced that it has started processing individual tax returns affected by legislation enacted in December. On Monday, IRS systems began to accept and process both e-file and paper tax returns claiming itemized deductions on Form 1040, Schedule A, as well as deductions for state and local sales tax, higher education tuition and fees and educator expenses.

Earlier, in 2010, the IRS announced it would delay processing of some tax returns in order to update processing systems to accommodate the late tax law changes. These tax law provisions were extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which became law on December 17, 2010.

Due to the expected increase in tax return volumes being transmitted this week, the IRS cautioned a small number of taxpayers may experience a brief delay in receiving their e-file acknowledgment, which is normally provided within 24-48 hours.

Business taxpayers who use the 1040 series can file now as well. However, the February 14 start date does not apply to non-1040 business tax forms affected by the recent tax law changes. The IRS will announce a specific date in the near future when it can begin processing those impacted business tax forms.