People across the United States rushed this week to pay their 2018 property taxes early, hoping to take advantage one last time of a federal deduction for state and local taxes that will be scaled back under the tax-code overhaul signed by President Donald Trump.
On Wednesday, however, the Internal Revenue Service announced that those prepayments could be deducted only in limited circumstances, a decision that appeared to invalidate many taxpayers’ efforts and raised the prospect that local governments could come under pressure to refund millions of dollars.
The announcement stoked confusion surrounding one of the most controversial elements of the tax law – a $10,000 cap on deductions for state and local taxes that will disproportionately affect higher-tax, Democratic-leaning states. It also offered a glimpse of the kind of hiccups that could arise in coming weeks as the IRS releases guidance on other facets of the bill, the largest overhaul of federal tax law in three decades.
In affluent states with high taxes and property values, local officials have been besieged in recent days by people trying to pay their 2018 property taxes early so they can deduct those payments before the cap takes effect.
However, the IRS said Wednesday that filers could only avoid the cap by paying property taxes that have been assessed in 2017. Many local governments have not completed assessments for upcoming years.
The deduction for state and local taxes is especially popular in high-income, highly taxed and often left-leaning states: More than 37 percent of tax returns in Virginia included the deduction in 2015, compared with 23 percent in Texas, according to the nonpartisan Tax Policy Center. In the District, 40 percent of returns deducted state and local taxes, and in Maryland, 46 percent.
Nationally, more than 96 percent of tax increases resulting from the loss of the state and local deduction will be paid by those in the top 20 percent of the income distribution, a recent analysis by the Tax Policy Center found.
Republican supporters of the bill say the cap on deductions and other changes were needed to offset a reduction in personal and corporate income tax rates.
The tax law explicitly states that the $10,000 deduction cap cannot be avoided by prepayment of 2018 income taxes but had left open the question of whether it applied to prepaid property taxes.
While the IRS announcement sought to clarify rules regarding prepayment, many questions remain. Counties across the country have different laws and timelines for assessing property taxes, potentially making it difficult for the agency to enforce its interpretation, tax experts said.
(c) 2017, The Washington Post · Peter Jamison, Jeff Stein, Patricia Sullivan