Could you prepay your real estate tax in 2017 and avoid the 2018 federal tax law’s cap on a state and local deduction option? The new law went into effect Jan. 1, but many Northern Virginians made a last minute push to try and prepay 2017 property taxes before the law went into effect. Whether this tactic will work is unclear, and left localities in an understaffed holiday season reeling to try to keep up with the initial demand for prepayments followed by a wave of requests for refunds.
“Under new tax legislation, only the first $10,000 of state and local taxes are going to be deductible for tax year 2018 and forward,” said Craig Fifer, director of communication and public information for the City of Alexandria. “This led to many asking if they can prepay their state and local taxes in 2017 to see if they can avoid the increase in 2018.”
Fifer said the city has always taken pre-payments, but that it was still unclear whether or not it would be deductible for federal taxes.
“If you would like to give us money before it’s due, we will take that, hold it, and apply it to future balances,” said Fifer. “We do not have to change our policies or procedure to accept prepayments. However, we can’t tell the individual taxpayer whether there’s any benefit to prepayment.”
In Northern Virginia, this led to a flood of prepayments. Fifer said over 650 people sent in over $6 million in prepayments.
“We’ve had one of those weeks around here,” said Carla de la Pava, Arlington County treasurer. “It is unexpected and 40 percent of the staff is out on vacation.”
A statement released by the IRS on Dec. 27 clarified that items were only deductible from 2017 if they were assessed in 2017. Fifer said that Alexandria cannot assess 2018 real estate taxes in 2017. But Fifer and de la Pava said there is still the possibility that the future interpretation of the law could change.
“The jury is still out on whether this will be deductible,” said de la Pava. “The IRS has put out something saying it will not be deductible. We took in over $3 million yesterday alone and people are still making their payments. It’s not like they’re buying something on sale they might not use later. If they have money in the bank, the opportunity cost is fairly low. People are taking a chance that maybe something will change. If you don’t make the payments, you definitely won’t be able to take advantage of it.”
On the last day to make the payment in 2017, de la Pava there were over 1,8000 customers pre-paying $14.7 million in taxes in Arlington.
“Now many want refunds,” said Fifer. “We spent that last week and beginning of this week scrambling to accept prepayments, now we’re working to go through the refunds. This puts a significant strain on local governments to receive and now refund this many prepayments.”
While other states have been working to review their tax cycles to accommodate the issue, in Virginia, Fifer said the assessment cycle begins on Jan. 1 and ends June 15.
“There are experts and tax advisors telling people different things,” said de la Pava. “I don’t think there’s any clarity. This bill Congress passed has created a lot of uncertainty and people are responding.”