The passage of the Tax Cuts and Jobs Act of 2017 sent people in highly taxed states scrambling to get their property taxes paid in 2017 before new limitations affected their deductibility in 2018. Will these property tax pre-payments be deductible in 2017? Well, that depends.
New Jersey taxpayers need to be aware that the amount they can deduct on their federal tax return is not the same as the amount they can deduct on their state tax return. On a federal level, property taxes paid in 2017, plus any prepayments made by December 31, 2017 for assessed 2018 property taxes, are deductible in the 2017 tax year.
However, according to the New Jersey Division of Taxation, those prepayments made for 2018 assessments can only be deducted on 2018 New Jersey tax returns. In New Jersey the property tax year must match the income tax year when attempting to take deductions. You may be able to deduct up to 100% of your property taxes due and paid up to $10,000, whichever is less.
Also according to the New Jersey Division of Taxation, "residents can claim a deduction or credit on their New Jersey income tax returns for the property taxes they have paid. However, they can take the deduction or credit only in the year in which the property taxes were due. Taxpayers cannot take deductions or credits for 2018 property tax pre-payments on their 2017 New Jersey Income tax returns (NJ-1040). They must wait until they file their 2018 returns."
The difference between the state and federal deductions can vary widely, particularly when looking at residents who pay real estate taxes higher than the $10,000 state and local tax deduction cap outlined in the Tax Cuts and Jobs Act in December. The passage of the Act caps the amount of state and local taxes that can be deducted on federal income tax returns at $10,000 starting in 2018.
For New Jersey, the new federal cap on property tax deductions weighs harshly compared to other states as it has the highest property taxes in the nation. Governor Christie signed an executive order in December requiring state municipalities to accept property tax prepayments for at least the first and second quarters of 2018. However, only payments for the actual assessed amounts can be deducted, not tax estimates.
There are numerous changes in the tax bill for 2018 that the IRS will need to provide guidance on, so its resources will be squeezed as it tries to provide direction related to the new law while also administering the current filing season. Consult with your Smolin tax advisor sooner than later, as tax planning could not be more important at this time.