The property tax deduction is one of the biggest benefits of homeownership — even with the latest tax reform. Though new tax laws cap the deduction at $10,000, the large majority of American homeowners fall under this threshold, meaning they can deduct the full amount of their property taxes year after year, for as long as they’re in the home.
And while property taxes are technically due annually, there are some cases where you might want to prepay property taxes — a year ahead of time. Depending on your financial situation, any upcoming changes to tax laws and other details, it could mean more money saved and healthier cash flow for the next couple years.
Please keep in mind, though, that while we are mortgage professionals, we are not tax professionals. Nothing in this blog should be considered tax advice — that’s always going to vary depending on your unique situation. Please contact your CPA, financial advisor, or other tax professional for more specific details.
Paying Your Property Taxes Early
First off, is prepaying property taxes even allowed? Unlike prepaying your mortgage, there aren’t any rules or regulations saying you can’t pay your taxes early. This became clear last year when many high-value homeowners moved to prepay taxes before the new deduction cap went into effect this year.
The IRS — nor any state or county property tax boards — didn’t move to prevent any of these homeowners from making prepayments, and it likely saved them thousands upon thousands of dollars once tax day rolled around. The main thing you’ll want to consider before pre-paying is your personal financial situation and cash flow. If your property tax bill is $4,000 can you afford to double that and pay $8,000 instead?
There is a catch, though — at least if you want to deduct that extra property tax payment on your annual returns. Though you can prepay property taxes as much as you want, you can’t deduct any tax payment if you don’t have the official tax assessor’s bill in hand yet. In short, you can’t deduct 2018’s tax payment until you have the official balance from your city or county. These are usually sent out in the fall, so it would mean you’d need to wait until the end of the year to make the payment to ensure you can deduct the full amount come April 15.
Why Would You Want to Prepay Property Taxes?
As long as your two tax payments put together are less than $10,000 — and you make the payment after you’ve receive your official tax bill — paying early means double the deduction on your returns. That can significantly reduce your tax burden and increase your subsequent refund.
It also means no tax payment in the new year. This can be helpful if you know money will be tight, are expecting a change in your income or household expenses, or just need to save for some big, upcoming costs.
Keep in mind that prepaying your taxes this year — and taking the deduction — means you won’t be able to deduct those same taxes the next year. That could work in your favor, though. If you know your household will fall into a lower income bracket in the coming year (meaning a lower tax rate), deducting those payments now is definitely more beneficial. You’ll get to deduct them at your current, higher tax rate, rather than the lower, less expensive one next year. That means more money saved!
When Shouldn’t You Prepay Property Taxes?
If you’re going to go over the $10K limit, prepaying your property taxes likely won’t have much financial benefit. Aside from costing you double (or more), you won’t be able to deduct the full payment on your tax returns, meaning you lose even more cash.
You also probably won’t want to prepay if you’re in an Alternative Minimum Tax state, like New Jersey and New York. These states have a required minimum that residents must pay, so if double-deducting property taxes puts you under that minimum, it doesn’t matter — you still have to pay up (and in full).
Don’t prepay property taxes if you don’t have your official bill yet either, as this disqualifies you from deducting it from your tax returns. Unless you really need to because of expected income or cash flow changes, you’re better off waiting until next year, closer to the actual deadline. Then you can deduct the full amount and lower your tax burden.
Unsure? Consult a Tax Pro
If you’re in any doubt about whether prepaying your property taxes is beneficial — or even allowed — then consult an experienced tax professional. While we want you to save as much cash as you possibly can, we’re no tax experts — and a CPA or tax planner can give you much more specific guidance for your unique situation. They can also help you maximize your deductions and save you the absolute most on your annual returns.
We’re Here to Help
Have any questions about the benefits (tax or otherwise) of homeownership? Are you ready to take the leap? Get in touch with a loan officer at Embrace Home Loans today. We’re here to help.