With the passing of a new tax bill imminent a question that has risen is whether to prepay your individual state income and real estate taxes. As most of you are aware the new tax bill will limit the deduction for state taxes to a combined $10,000 starting in 2018. The bill will limit the amount of state income taxes deducted in 2017 to the amount of the tax payer’s 2017 state income tax liability. As such you cannot prepay future taxes. So for example, if your 2017 state tax liability is 30,000 and you paid in $50,000 prior to the end of the year you will only be allowed a deduction for $30,000 in 2017. The remaining $20,000 will be disallowed in 2017 and either applied to 2018 and be included in the limitation of $10,000 or be refunded.
It is unclear as to how the rule will be applied to real estate tax. Clearly if you have not been assessed a tax for 2018 then you cannot prepay the tax, (i.e., if you will be assessed in June of 2018 for the second half of 2018 that cannot be deducted in 2017). It is unclear that if you were assessed already for the first two quarters of 2018 and you prepaid the tax in 2017 whether it will be disallowed. The bill specifically addresses state income tax and is silent as of now on property tax. As such, a tax assessed in 2017 by a municipality for the first half of 2018 may be deductible since it has been assessed and in prior years if paid earlier would have been deductible in the year paid. But, as said above it is uncertain.